The circular debt mitigation plan was approved by Cabinet Committee on Energy (CCOE) on Monday in order to curtail losses and improve recoveries over a period of three years.
The debt mitigation plan covers the period FY21 to FY23 which will help cut the flow of circular debt from the current Rs538 billion per annum to less than Rs112 billion per annum.
Moreover, the cabinet body on energy was informed that the power sector could add Rs538 billion to the circular debt if the corrective measures proposed in the circular debt mitigation plan were not taken.
The Power Division informed the CCOE meeting that pending policy decisions contributed more than 70% to the circular debt.
It further projected that in 2023, the circular debt would rise to Rs1.258 trillion from Rs881 billion in 2022 and Rs436 billion in 2021 if the government failed to take measures.
The committee was informed by the Power Division that collections by distribution companies would rise 5.73% and losses would fall 2.12% following implementation of the circular debt mitigation plan.
However, the Power Division warned that the circular debt would jump by Rs495 billion per annum if the Water and Power Development Authority (Wapda) paid net hydel profit (NHP) in line with the AGN Kazi formula.
The plan also proposed an increase in tariff. The Power Division estimated the increase under the quarterly tariff adjustments in October 2021 at Rs1.59 per unit. It will reduce the burden by Rs97 billion in FY22 and by Rs54 billion in FY23.
It was also informed that the tariff would rise by Rs1.39 per unit in July 2021, which would have a financial impact of Rs181 billion.
The plan also envisages technical losses of 17% in FY21, 16.32% in FY22 and 15.70% in FY23.
According to a statement, the CCOE meeting, chaired by Federal Minister for Planning, Development and Special Initiatives Asad Umar, discussed the summary of the comprehensive Circular Debt Management Plan (CDMP) 2021, which covered the three-year period from FY21 to FY23, described the mechanisms and initiatives to address the issues and suggested an action plan to control the circular debt with a monitoring matrix.
The CCOE approved the summary presented by the Power Division to ensure the effective management of circular debt.