The circular debt owing by Chinese businesses’ Independent Power Producers, or IPPs, exceeds Rs400 billion, making it difficult for the Chinese to pursue other power sector projects aggressively.
According to a report, the whole power sector’s circular debt has risen to Rs2.6 trillion by the end of October 2023.
The unrelenting surge in circular debt, escalating by Rs75 billion monthly, has become an alarming concern, according to top official sources. The mounting circular debt pertaining to Chinese Independent Power Producers (IPPs) mirrors the persistent challenge of managing an ever-increasing financial burden.
Several months ago, the circular debt for Chinese IPPs had reduced to around Rs250 to Rs300 billion following partial payments by the previous government. However, it has since ballooned again, causing apprehensions about potential repercussions.
Officials warn of the possibility of the Chinese slowing down progress on other power projects if the circular debt issue remains unresolved. The Power Ministry has engaged with Chinese authorities, requesting an extension of the debt-to-equity ratio maturity on Chinese IPP projects. Yet, finding a solution remains complex, particularly for Chinese power plants reliant on imported coal and RLNG, as their capacity repayment exacerbates the challenges faced by powerless consumers.
The Chinese reluctance to repay capacity commitments in local currency poses difficulties for a nation grappling with a depreciating rupee against the dollar. Repayments are linked to the dollar rate parity against the rupee, and the cost of imported coal, which increased by over 450%, further compounds the issue. Officials suggest that the government may propose the utilization of domestic coal instead of imports to mitigate power generation costs.
As of June 2023, the circular debt reached Rs2.3 trillion, surging by Rs250 billion by October 30, 2023, to stand at Rs2.6 trillion. The government has shared revised estimates with the International Monetary Fund (IMF), projecting a further escalation of Rs385 billion by the end of December. The outstanding amount payable to power producers is Rs1.75 trillion, with power distribution companies registering losses of Rs76 billion in the initial four months of the current fiscal year.
Despite efforts to address the crisis through measures such as baseline tariff adjustments, fuel price revisions, surcharges, and quarterly tariff adjustments, the power sector remains entangled in a precarious situation.
Despite attempts to seek insights from high-ranking officials in the power ministry, no responses were received, underscoring the urgency and complexity of the challenges faced by the power sector in Pakistan.
