Page 85 - CMA Journal (Mar-Apr 2025)

Addressing the Root Causes of Circular Debt
Articles Section

in Pakistan's Energy Sector

Introduction inefficient billing systems,
which intensify the deficit.
The energy sector of Pakistan faces numerous financial
problems, but the circular debt crisis remains its most An additional cause stems
intense and complicated issue. Circular debt, in its most from increasing capacity
basic form, refers to a recurring cycle of unpaid dues payments to independent
across the energy supply chain. The issue starts when power producers (IPPs).
Distribution Companies (DISCOs) fail to collect full The government’s
payments from electricity customers. The resulting financial capacity is
shortage of funds prevents power generation companies diminished by these
from paying their fuel suppliers. These payment defaults payments, which do not
initiate a destructive process, draining sector liquidity, contribute to improving Ali Noman Siddiqui
generating operational problems, and diminishing power grid stability. Research Scholar and
service quality. Outdated agreements Senior Vice President
between the state and [Human Resource
The root cause of this power crisis goes beyond technical Management Group]
power producers continue
and financial constraints, as structural flaws and National Bank
to create imbalanced
institutional weaknesses within the sector contribute of Pakistan
financial situations. The
significantly to the problem. Faulty planning,
availability of DISCO
unreasonable tariff systems, ineffective subsidy
subsidy payments from government entities is delayed,
strategies, and weak regulatory control mechanisms
while government-owned cross-internal debt hinders
exacerbate the crisis.
cash flow.
Research by the World Bank and OECD demonstrates that
Arbitrary pressure from political influences distorts
governmental failures, combined with incentive
energy tariffs, as Pakistan lacks a strong, independent
problems between regulators and operators, lead to
energy regulatory body. This situation has deterred
increased difficulties (World Bank, 2020). Bailout
investments in upgrading infrastructure.
packages and deferred payment arrangements offer
brief respites without addressing the fundamental issues. Public-sector utilities operate with inefficient governance
Circular debt has evolved into a major organizational structures and inadequate accountability systems. The
challenge that obstructs the energy infrastructure from DISCOs maintain poor performance tracking while
enabling economic expansion and attracting showing minimal operational transparency. The lack of
investments. customer-focused service delivery worsens financial
outcomes. The issue is further complicated by
Anatomy of Circular Debt macroeconomic factors such as currency devaluation
The circular debt amount in Pakistan has exceeded PKR and global energy price volatility. The mass importation
2.5 trillion, while the country has accepted various of fuel for electricity generation leads to increased costs,
bailout schemes and introduced reform measures (Ali & with inadequate price transmission to consumers due to
Badar, 2010; OECD, 2022). The continuous recurrence of fixed energy tariffs.
debt shows that bailouts and reform efforts have failed to Escalating Crisis: Causes and Consequences
deliver sustainable solutions. The time frame of financial
movement within the energy value chain is unstable due The Pakistani power sector faces a fundamental problem
to mismatched revenue streams and costs. because installed power production exceeds actual
usage. The Pakistani government actively invested in
The fundamental reason behind circular debt arises from power generation via IPPs, but transmission and
the difference between power production expenses and distribution infrastructure development has remained
the pricing offered to final consumers. Energy prices in behind. This causes major energy wastage and underuse
Pakistan remain lower than what is required to recover of produced power (Arshad & O'Kelly, 2018). Liquefied
costs due to government intervention. Distribution natural gas (LNG), furnace oil, and coal serve as imported
companies face a growing shortfall in revenue because of fuels, which drive up generation costs. Global price
technical and distribution (T&D) losses. Revenue streams fluctuations and currency depreciation further increase
are further damaged by theft, non-payment, and
these costs, but controlled tariffs prevent full recovery.
ICMA’s Chartered Management Accountant, Mar-Apr 2025 83