Energy Sector’s Circular Debt Hits Rs5.5 Trillion, World Bank Urges Further Reforms

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The World Bank has issued a concerning report indicating a significant surge in Pakistan’s energy sector circular debt, which has now reached Rs5.5 trillion, equivalent to about 5.1% of the country’s GDP as of January this year.

Despite attempts to alleviate the issue through price adjustments and anti-theft measures, circular debt in the power and gas sectors continues to rise by an average of Rs135 billion monthly.

The Bank emphasizes the urgent need for the Pakistani government to intensify efforts to recover the actual costs of energy supplies. While the government has implemented reforms to curb circular debt growth, the Bank stresses that more decisive actions are imperative to tackle the persisting challenges.

Moreover, the report highlights a notable increase in energy inflation, soaring from 40.6% to 50.6% between the first halves of fiscal years 2023 and 2024, driven by substantial hikes in domestic energy prices. Circular debt in the power sector alone has surged by an average of Rs66.14 billion monthly, reaching Rs2.635 trillion by January’s end, compared to Rs2.172 trillion in June 2023.

Similarly, the gas sector’s circular debt has risen by Rs68 billion monthly to Rs2.866 trillion over the same period.The World Bank urges the Pakistani government to persist with reforms in energy tariff structures for electricity and gas to accurately reflect supply costs and manage the escalating debts.

Structural challenges, inadequate planning, and extensive subsidies have resulted in significant inefficiencies and deficits in the power sector, with Pakistan having the highest energy subsidies in South Asia, totaling about 0.9% of its GDP.

These issues, along with non-reflective tariffs, operational inefficiencies, and high theft levels, have hindered revenue collection, exacerbating the circular debt situation.The Bank also highlights the adverse effects of “take-or-pay” contracts signed in 2018 for imported coal and gas power plants, which have increased capacity payments and exposed the country to international fuel price fluctuations.

To address these challenges, the World Bank recommends privatizing distribution companies, reducing generation costs, increasing renewable energy utilization, and enhancing regulatory capacity.

Recognizing Pakistan’s hydro, solar, and wind energy potential, the Bank underscores the necessity for a reinforced and expanded transmission grid to accommodate seasonal demand fluctuations and effectively leverage renewable resources.

 

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