ISLAMABAD: The Ministry of Energy in Pakistan has proposed a plan to the Special Investment Facilitation Council (SIFC) to reduce the power-sector circular debt, which stands at Rs 2.3 trillion. The plan involves a combination of budget subsidies, policy, and agreement revisions.
This proposal has been shared with a committee of the civil-military forum and will be fine-tuned in consultation with the Ministry of Finance. However, the interim Finance Minister has declined any further “fiscalization” of power-sector losses through budget subsidies.
Over the years, the energy ministry has used substantial subsidies to support the power sector, which has been grappling with high losses, low recoveries, unbudgeted subsidies, and problematic agreements. The circular debt reached Rs2.31 trillion as of June this year.
The Ministry of Finance allocated Rs976 billion in subsidies for the current fiscal year to maintain the debt at its existing level, in accordance with an agreement with the International Monetary Fund (IMF).
The plan suggested that the entire commercial banks’ debt of Rs765 billion would be made part of the public debt, and another Rs565 billion debt would be retired on maturity. However, a Rs200 billion loan raised through Islamic bonds in 2020 was not included in the debt, and the Ministry of Finance was not receptive to the proposal to include it.
The revised Circular Debt Management Plan is already under implementation, with the Ministry of Finance making timely payments to keep the circular debt within agreed limits. Additional financial needs beyond the fiscal year’s commitments will be reviewed during the next year’s budget.
The energy ministry is also seeking fiscal space over three years to pay interest on delayed payments to independent power producers (IPPs), proposing that about Rs237 billion in interest payments be covered by the Ministry of Finance during the next three fiscal years. However, the ministry has not agreed to this proposal.
The government has previously imposed a debt servicing surcharge to service the debt in the holding company but does not cover the interest payments to the IPPs for delayed payments.
The Power Division has projected an addition of Rs177 billion to the circular debt in the current fiscal year due to interest payments and estimates a loss of Rs387 billion due to insufficient recoveries and losses in the current fiscal year.
The total financial impact of the anti-theft campaign was estimated at Rs38 billion, including the second-order impact on theft and the recovery of billed amounts in September, which led to an increase in collections to 87% in the month. However, electricity prices in Pakistan have become unaffordable for many due to consistent tariff increases to cover the power sector’s losses and inefficiencies.
The Ministry of Energy has presented an option for settling Rs346 billion worth of circular debt through the revision of agreements with K-Electric and resolving a dispute over late payment surcharges. Additionally, about Rs120 billion in debt would be reconciled with provincial governments, and another Rs26 billion would be recovered from the federal government.
The energy and finance ministries are expected to work together to develop a plan for retiring the remaining circular debt through the sale of power-sector assets. Despite the commitment to the IMF to keep the circular debt at current levels, it will be done through budget subsidies, with the circular debt projected to increase by Rs545 billion by March 2024 before settling at Rs392 billion by June next year. This Rs392 billion increase will be adjusted against the reduction in the previous debt stock through subsidies.
