Debt that stays

Pakistan's power sector is grappling with a growing circular debt, which climbed by Rs61 billion in the last fiscal year to approximately Rs1.67 trillion. This figure surpasses the International Monetary Fund's (IMF) funding program condition to keep the debt stock capped at Rs1.61 trillion.

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The power sector’s circular debt grew by Rs61bn in the last fiscal year, taking the total to roughly Rs1.67tr from Rs1.61tr a year before. This breaches the IMF funding programme condition to cap the stock at Rs1.61tr.

The Power Division points to a significant cut in federal subsidies, stating that Rs98 billion was trimmed from the allocated Rs893 billion for the sector. Officials argue that without this subsidy reduction, the debt would have actually fallen to Rs1.58 trillion. However, this explanation highlights the inherent fragility of a system that relies on fiscal transfers to avoid accumulating new arrears.

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The Power Division blames a federal subsidy cut: Rs98bn was trimmed from the Rs893bn allocated for the sector, and officials say the debt would have fallen to Rs1.58tr without that cut.

Past attempts to resolve the issue, including renegotiating power purchase agreements, decommissioning old plants, and increasing tariffs, have proven insufficient. A substantial Rs1.23 trillion financing deal with 18 banks, serviced by a surcharge on consumers, was touted as a historic transaction but has not halted the debt's resurgence. Debt continues to be shuffled between ledgers rather than being eliminated.

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Disco losses have dropped from Rs591bn to Rs326bn over two years, a welcome improvement.

While a reduction in distribution losses from Rs591 billion to Rs326 billion over two years is a positive development, it contrasts sharply with a system that consistently requires higher tariffs, larger subsidies, and new borrowing. The increasing reliance on rooftop solar by consumers who can afford it further exacerbates the problem, as the fixed costs of the grid are borne by a shrinking pool of remaining customers. This creates a cycle where higher bills for remaining consumers incentivize more to switch to solar, leading to even higher bills.

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And every fresh tariff hike gives the next affluent household a reason to instal panels of their own. Hence, fewer paying customers, higher bills for those who remain, and more reason to exit.