Escalating Circular Debt

As highlighted by the World Bank’s report, there has been a signifi­cant increase in circular debts within Pakistan’s energy sector. The increase in theft, billing defaults, and energy price hikes along with subsidies have contributed majorly to the surge in this debt which has now reached 5.5 trillion rupees.

Due to inefficiencies across the power sector, exacerbated by structural is­sues, poor planning, and subsidies, there were some deficits and supply re­liability issues. It must be noted that Pakistan’s energy subsidies are among the highest in South Asia, and a huge number of these subsidies are allocated to electricity consumption. The tariff remains below the cost recovery level and a huge number of consumers continue to benefit from these subsidies. These subsidies, therefore, lead to the accumulation of circular debt.

The circular debt problem of Pakistan is further worsened by logistical issues such as theft, poor infrastructure, and inefficiencies within state-owned electricity distribution companies such as outdated metering prac­tices. This increases the operational costs of these companies, undermining the revenue collection efforts. Similarly, the gas sector of the country is also undergoing some challenges. The circular debt, in this case, is rising due to the delays in tariff adjustments, and the diversion of expensive RLNG (Re-gasified Liquefied Natural Gas) to domestic consumers during winter.

Moving forward, the government must respond proactively to these is­sues. It is important to understand that while subsidies provide relief to consumers, they often lead to distorted market dynamics. It is important to rationalize subsidies for aligning tariff structures with the true cost of en­ergy supply. A gradual approach must be taken towards subsidy reform, as by removing subsidies abruptly the economic state of a country may be dis­rupted. Moreover, to address the issues in the gas sector, the dependence of the state on imported fossil fuels must be reduced. Alternative sources of renewable energy must be explored. There is a lot of untapped potential in Pakistan in hydro, solar, and wind power and it is important to tap into these resources to avoid reliance on external assistance and imports.

Pakistan must address these systemic issues and take strong measures to mitigate the increasing circular debt in its energy sectors. By upgrading in­frastructure, implementing modern metering technologies, improving gov­ernance and accountability, and cracking down on illegal activities, Paki­stan can cater to these issues effectively.

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