Pakistan's circular debt reduces by PKR 12 billion in November

Pakistan's circular debt decreased by PKR 12 billion in November, bringing the total to PKR 2.381 trillion, down from PKR 2.393 trillion at the end of fiscal year 2023-24 (FY24).

The reduction was observed in debt payable to power producers, GENCOs' fuel suppliers, and amounts parked in Power Holding Limited (PHL), among other factors affecting the country's circular debt.

Meanwhile, key contributors to the circular debt remain budgeted but unreleased subsidies, interest charges, pending generation costs, and non-payment by K-Electric. An analyst also pointed out inefficiencies and under-recoveries of distribution companies (DISCOs) and various other adjustments as significant factors.

Circular debt in Pakistan's power sector stems from non-payments between distribution and transmission companies. Delays in tariff determination, high line losses, and poor revenue collection by DISCOs have been the main culprits over the years.

The government's concentrated efforts to prevent a buildup have resulted in no additional accumulation in recent months. Authorities have managed the outstanding debt through fiscal allocations and prudent tariff adjustments.

Deals with IPPs

Recently, five major Independent Power Producers (IPPs) agreed to terminate their contracts and shift to 'Take and Pay' terms, with 18 more expected to follow suit. The federal cabinet has given the go-ahead for deal negotiations with 14 IPPs this week.

Additionally, IMF guidelines to terminate gas supply to Captive Power Plants (CPPs) and shift them to the power grid are expected to reduce power sector circular debt. However, this could potentially increase gas sector circular debt.

The current IMF program aims to enhance overall government effectiveness and accelerate economic transformation, with energy sector reforms being a key initiative.

An analyst at JS Global said by the end of January, key policy actions are set to be completed, including preparing two DISCOs for privatization and improving their management and operational efficiency.

Efforts are also being made to discontinue gas supply to CPPs and push them to shift to the grid, redirecting gas to the most efficient power generators. This diversion of gas from CPPs to the power sector could have divergent implications for both sectors.

The government aims to achieve a 60%+ share of electricity generation capacity through indigenous clean energy technologies by 2031, based on the Indicative Generation Capacity Expansion Plan (IGCEP).

The shift away from furnace oil, the most expensive source of power generation, is evident as it now accounts for 0% of the energy mix. Renewable sources like wind, solar, and bagasse generation represented 1.2%, 0.9%, and 0.6%, respectively, of the overall generation during the outgoing month.