Pakistan approves circular debt management plan agreed with IMF

Pakistan approved Circular Debt Management Plan for Fiscal Year 2024-25 (FY25) on Monday, which aims to reduce liabilities in the power sector and enhance financial sustainability agreed upon with the International Monetary Fund (IMF) for a 37-month program.

The approval was given during a meeting of the Economic Coordination Committee — the country's top economic decision-making body — chaired by Federal Minister for Finance and Revenue Senator Muhammad Aurangzeb.

The plan was submitted for approval by the Ministry of Energy's Power Division.

Sources told Nukta that the government is continuously working towards resolving multifarious challenges surrounding the country's troubled power sector. One such major challenge is that of circular debt, which stood at PKR 2,393 billion at the end of FY24.

An increase in circular debt accentuates the already constrained supply of electricity, which resultantly slows down economic growth.

Accordingly, there is a need to address the flow of the circular debt through effective efficiency improvement measures, the sources pointed out.

The Circular Debt Management Plan (CDMP) intends to reduce the flow of circular debt to the minimum possible level.

As a result of the development, implementation, and monitoring of the CDMP, the circular debt flow was negative PKR 27 billion for FY22 and PKR 57 billion for FY23.

Meanwhile, the circular debt flow for FY24 was PKR 83 billion because of several reasons, including under-recoveries by power distributors, line losses above regulatory targets, pending generation cost, markups, etc.

The sources continued that several factors can affect the forecasting accuracy of the plan and create major uncertainty, including fuel price volatility, economic parameter variation, resource availability, change in commercial operations date of upcoming power plants, etc.

Similarly, a change in demand or generation mix, the KIBOR (Karachi Interbank Offered Rate), inflation, imported coal price, LNG and crude oil prices, have major implications on power purchase cost.

Accordingly, a new iteration for forecasting of power purchase price, which is around 85-90% of total power sector revenue requirement, has been carried out for FY25.

Aligning the CDMP with the latest forecast is a continuous process for accurate monitoring, according to the sources.

Based on latest assumptions as accounted for by NEPRA — Pakistan's electricity regulator — in its determination of power purchase price references dated June 14, the Power Division has developed the Circular Debt Management Plan FY25 covering the budget allocational decisions taken by the Finance Division.

Without any interventions, the base case circular debt flow on the latest assumptions for FY25 is expected to be PKR 1,077 billion, which is planned to be mitigated at PKR 36 billion in the CDMP FY25 through timely tariff increases, improvement in losses, and fiscal support.