Emergence of Circular Debt in Pakistan and its Mitigation Measures

Abstract

The importance of power sector in the economic growth of the country has always been considered a universal truth. The world has acknowledged the importance of power sector for any country and considered it a backbone of economic structure. This project report investigates Pakistan's energy sector's issue with circular debt. The report describes the power sector in Pakistan and then discusses why circular debt has developed in the industry. Circular debt must be resolved since it will ease supply constraints. Given that the outstanding stock of circular debt needs to be paid off, the process, however, is difficult. In addition to causing financial problems, it has had a long-term negative impact on the sustainability of the entire power sector of Pakistan. The report shows that this financial liability is caused by a number of factors, including governance problems, operational and commercial inefficiencies in the system, a lack of efficient planning and bad policies on the generation, transmission and distribution sector, distortions in energy pricing strategy, and irrational subsidies on the demand side. This report aims to identify the underlying factors behind the existing circular debt and the actions that must be taken to not only pay off the debt but also keep the reform process going. The report has also proposed a number of mitigation measures to address the issue of Circular debt in power sector of Pakistan including but not limited to privatization of DISCOs. The analysis is based on evidence/data from many reports, research projects, and other sources.