Circular Debt in Energy Sector: a Conundrum For Pakistan

The circular debt in the energy sector has become a conundrum for the government of Pakistan that it has not been able to manage to push towards resolution.

As per an agreement in August 2020, the federal government agreed to pay an outstanding of Rs 450 of Rs 911 billion circular debt to independent power producers (IPPs) under upfront tariff.

As per the pact, the power producers and government had to sign fresh agreements with the government within six months under Power Purchase Agreements (PPAs).

IPPs complain that the government had committed to pay Rs 400 billion lump-sum to them however it convinced them of payment of Rs 260 billion through Treasury Bills (T-Bills).

The government had further decided to pay Rs 140 billion in cash however it has not been done so far.

In the meantime, the National Electric Power Regulatory Authority (NEPRA) initiated an inquiry against IPPs after the findings of the Muhammad Ali commission.

IPPs hold the view that the agreement between them and the government could not be adjudicated by NEPRA and it could only be taken to the International Court of Justice for adjudication.

Meanwhile, the IPPs and Minister for Finance Dr Hafeez Shaikh will hold a meeting on February 13 for the finalization of the amendments in PPAs.

The ministry of energy has three challenges that are looming over it.

First, it has to settle arrears of Rs 400 billion to 47 IPPs followed by inking an agreement with them under new PPAs in February.

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Challenges for energy ministry

The biggest challenge is the mounting figure of circular debt has gone up to a whopping Rs 2,880 billion.

The plight of the government does not end here as it will have to enlist the circular debt amount, which it is currently hiding in the energy sector, in the budget as a deficit as the International Monetary Fund (IMF) has conditioned Pakistan.

Doing so will further mire the government into difficulties as it would shoot up budget deficit while the volume of loans would also go up if the payment to IPPS was made using T-bills.

Role of Cabinet Energy Committee

The Cabinet Committee on Energy (CCoE) led by Minister for Planning Asad Umar is deliberating on how the government would remove the burden of Rs 400 billion from its shoulders.

It held several meetings on the issue but has yet not come to a solution to be presented before the Economic Coordination Committee (ECC).