Challenge of power sector circular debt |
Pakistan has been undergoing the never-ending rigmarole of refinancing the power sector circular debt. It is never ending - as successive governments have been refinancing the symptom and ignoring the disease.
Pakistan’s latest outreach to the Asian Development Bank (ADB) for substantive additional debt to retire the remaining Rs1.7 trillion circular debt and refinance part of the recently acquired Rs1.25 trillion commercial financing may provide short-term breathing space. But it once again exposes a chronic policy reflex: treating the power sector’s circular debt as a financing problem rather than a governance failure.
At one level, the logic is understandable. ADB financing is cheaper than market borrowing, offers longer tenors, and can soften the immediate pressure on electricity tariffs. With ADB’s exposure already at around $17 billion — Pakistan’s third-largest creditor after China and the World Bank — the multilateral lender is a natural candidate to help restructure expensive power sector liabilities.
Longer repayment periods and lower interest rates could allow the government to retire debt without fresh budgetary injections, relying instead on tariff-based repayments at rates lower than those currently choking consumers and industry.
Yet this approach is not new. For over a decade, successive governments have periodically “solved” the circular debt through injections, bank........