The federal government of Pakistan has informed the International Monetary Fund (IMF) that the country’s power sector is expected to see its circular debt rise by Rs. 100 billion in the current fiscal year. According to high-level sources, the circular debt, already a persistent issue, is projected to surpass Rs. 2.55 trillion by June 2025, sparking concerns from the IMF regarding the management and future trajectory of Pakistan’s power sector finances.
As of now, the circular debt in the power sector has already reached Rs. 2.4 trillion. The rising debt has been a long-standing challenge for Pakistan’s economy, impacting everything from energy supply to economic growth. The IMF has consistently expressed dissatisfaction with the government’s efforts to manage the circular debt, pressing for urgent and effective measures to control its further expansion. The international lender’s key demand is that the government ensures the circular debt does not exceed Rs. 2.5 trillion by the end of the fiscal year, a threshold that is fast approaching.
Circular Debt Management Issues Persist Despite Tariff Adjustments
Despite repeated assurances from the Pakistani government to the IMF that measures, including timely tariff adjustments, would be taken to curb the circular debt, the problem persists. Last year, the government failed to manage the debt according to the agreed share plan, further complicating matters. These delays and missteps have led to a significant rise in debt, putting additional pressure on the government to meet the targets outlined in its agreement with the IMF.
The circular debt in the power sector primarily stems from inefficiencies, such as power theft, line losses, and delays in payments to independent power producers (IPPs). These factors create a continuous cycle of debt accumulation, making it difficult for the government to achieve financial stability in the energy sector. The IMF has been particularly vocal about the need for Pakistan to address these inefficiencies through reforms, tariff adjustments, and better governance.
IMF’s Demands: Urgency to Keep Debt Within Agreed Limits
According to sources, the IMF has emphasized that Pakistan must keep its circular debt within the agreed limit of Rs. 2.31 trillion for the current fiscal year. Exceeding this limit would not only breach the loan agreement but could also jeopardize future negotiations with the IMF on financial assistance and commitments. This poses a significant risk to Pakistan, especially given the importance of IMF support in stabilizing the country’s economy and securing external financing.
The IMF’s concerns about the circular debt are not new, but the looming increase has raised the stakes. With the debt expected to rise by Rs. 100 billion during the current fiscal year, the government is now under greater pressure to implement more aggressive measures to curb its growth. Failure to address this issue could strain the country’s relations with the IMF, potentially delaying future disbursements of funds and complicating Pakistan’s broader financial outlook.
Government’s Efforts and Future Challenges
In response to IMF concerns, the federal government has pledged to take several steps to manage the power sector’s debt. Among these is the implementation of a series of tariff adjustments aimed at passing on some of the costs to consumers. However, these adjustments have been met with resistance, as they often lead to public discontent due to rising electricity bills. The government must now balance the need to control circular debt with the socio-economic impacts of increasing tariffs, especially at a time when inflation and cost-of-living pressures are already high.
Moreover, the government will need to improve overall efficiency in the energy sector, addressing structural issues that contribute to debt accumulation. This includes reducing power theft, enhancing bill collection, and upgrading infrastructure to minimize line losses. These steps are critical not just for managing the circular debt but also for ensuring a sustainable and reliable energy supply for the country in the long term.
Implications for Pakistan’s Economic Stability
The circular debt crisis in the power sector remains one of the most significant challenges to Pakistan’s economic stability. With debt levels continuing to rise, the government faces increasing pressure to meet its commitments to the IMF while managing the growing financial strain on its energy sector. The IMF has made it clear that failure to control the debt within agreed limits could negatively impact future financial negotiations, potentially leaving Pakistan vulnerable to further economic instability.
As Pakistan navigates these challenges, the coming months will be critical in determining whether the government can successfully manage its circular debt and avoid breaching its agreement with the IMF. The rising debt figures are a stark reminder of the need for comprehensive reforms in the energy sector to ensure long-term sustainability and financial stability for the country.
In the short term, the government will need to accelerate its efforts to control the debt, implement tariff adjustments, and enhance sectoral efficiency to meet the IMF’s demands and stabilize the power sector’s financial health.