The CCOE approved debt mitigation plan which covers the period FY21 to FY23 aims to cut the flow of circular debt from the current Rs538 billion per annum to less than Rs112 billion per annum.
The cabinet body on energy was briefed that the power sector could add Rs538 billion to the circular debt if the corrective measures outlined in the circular debt mitigation plan were not taken. During the CCOE meeting, the Power Division informed the participants that pending policy decisions were responsible for more than 70% to the circular debt.
The power division warned that there are chances of the circular debt increasing to Rs1.258 trillion in 2023 from Rs881 billion in 2022 and Rs436 billion in 2021 if the government fails to take measures.
If the circular debt mitigation plan is followed properly, collections by distribution companies would rise 5.73% and losses would fall 2.12%, said the Power Division.
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The plan also asked for a rise in tariff. The Power Division predicted the increase under the quarterly tariff adjustments in October 2021 at Rs1.59 per unit. It will ease the burden by Rs97 billion in FY22 and by Rs54 billion in FY23. The cabinet body was also informed that the tariff would go up by Rs1.39 per unit in July 2021, which would result in a financial impact of Rs181 billion. The plan also anticipates technical losses of 17% in FY21, 16.32% in FY22 and 15.70% in FY23.
The CCOE meeting, presided over by Federal Minister for Planning, Development and Special Initiatives Asad Umar, discussed the summary of the comprehensive Circular Debt Management Plan (CDMP) 2021. The summary explained the mechanisms and initiatives to tackle the issues and suggested an action plan to curtail the circular debt with a monitoring matrix.
The CCOE approved the summary presented by the Power Division to ensure the effective management of circular debt. The committee also agreed on fast-track action for implementation of the Renewable Energy Policy approved by the government. It instructed the Ministry of Energy to expedite action for the auction of renewable energy projects to guarantee greater use of renewable energy resources.
A recent report released by The Macro Economic Insights report underlined the structural causes for the rising circular debt. It said that the high cost of electricity generation; tariff anomalies, including a significant difference between cost-recovery and notified tariffs; stubbornly high transmission and distribution losses coupled with low recoveries; unaddressed governance issues in the sector are all to blame for this burgeoning circular debt that has emerged in the power sector.
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The report stated that this issue has led to the destabilization Pakistan’s fiscal management and has imposed prohibitive opportunity costs in terms of pre-empting government spending on infrastructure and social expenditure. It further revealed that the fiscal costs to the budget have amounted to a further 1.2 per cent of GDP each year, on average, between FY2007 to FY2019. Total budgetary support to the power sector has amounted to Rs. 3,202 billion (US$31.4billion at the average exchange rate. The Macro Economic Insights report dubbed it as a threat to the country’s economic security.