Pakistan’s Energy Sector Battles $17.5B Circular Debt Crisis, Endangers Economy
This Debt is Three Times Higher Than Pakistan’s Defense Budget And is Increasing. Islamabad Considers Private Management of State-Owned Power Companies for Up to 25 Years
Pakistan’s energy sector faces an imposing challenge as its circular debt has ballooned to a staggering figure, nearing US$17.5 billion. This sum is nearly double the combined budget allocations designated for the nation’s defense and development, presenting a substantial obstacle to the country’s economic stability.
For the fiscal year 2023-24, this South Asian nation has earmarked a defense budget of $6.17 billion and a development budget of $3.2 billion.
This financial quandary is primarily rooted in the energy sector, with particular implications for the electricity and gas industries. It arises when various entities within the energy supply chain, encompassing power generation companies, distribution companies, and consumers, accumulate debts within a complex cycle.
Acknowledging the intricate nature of the circular debt issue and its profound impact on the economy, the government is considering a substantial course of action. It is contemplating the possibility of entrusting the management of state-owned power generation and distribution companies to private entities through concession agreements spanning up to 25 years.
Significantly, the circular debt crisis in the power sector, which has burgeoned to over US$7.9 billion, poses a grave threat to the sector’s long-term viability. Consequently, the government is adjusting its approach, seeking to distance itself from direct involvement in business operations.
Notably, the circular debt in the gas sector has surpassed that of the power sector, accumulating a total of US$9.59 billion, as stated by Pakistan’s Minister for Energy on Monday.
As local gas production wanes, Pakistan’s reliance on imported gas has surged. Minister Ali highlighted the procurement of liquefied natural gas (LNG) at $13 per unit, coupled with its sale to domestic and other consumers at $2.5 per million British thermal units (mmbtu), resulting in significant losses that contribute to the mounting circular debt in the gas sector.
In the gas sector alone, losses have exceeded US$3.4 million per day, translating to an annual loss of US$1.2 billion.
Pakistan currently hosts 10 state-owned power distribution companies, while the Karachi Electric Company was privatized in 2005. Additionally, four power generation plants are under consideration for inclusion in the proposed plan. These agreements would facilitate investments and infrastructure improvements. Islamabad is also in discussions with the World Bank’s International Finance Corporation (IFC) regarding long-term concession agreements.
