What’s behind Pakistan’s circular debt and why you should care

When you don’t pay your electricity bill, you’re not just cheating the system, you’re contributing to one of the biggest problems crippling Pakistan’s economy  – circular debt. Watch this video to find out how.

Currently, Pakistan’s circular debt stands at a whopping Rs1.4 trillion, which includes the loans accumulated by previous governments.

The menacing source of this burden is the relentless IOUs that keep piling up among all the players in our energy sector supply chain. This includes power distributors, power producers, as well as oil and gas companies – PEPCO (Pakistan Electric Power Company), IPPs (Independent Power Producers), K-Electric, Pakistan State Oil and Sui Southern Gas, to name a few.

Why should you care about circular debt? Because you may end up paying for it.

The origin of debt seems simple: When you cannot afford to pay back what you owe, you incur a debt.

But what if it wasn’t your fault in the first place?

What if you couldn’t pay what you owed, because someone else couldn’t pay you?

This is the chain of IOUs that has dominated discussions on energy financing in Pakistan since 2007, which was around the time international oil prices went up, coinciding with a sharp depreciation of the Rupee vs. the US Dollar

As importing oil became more expensive, the government at the time did not pass on the price increase to the customers, leading to an imbalance between actual money owed to fuel companies, and money available to collect from the end consumers. The fact that a lot of energy was wasted during transmission (and still is), and a lot of people didn’t pay their bills (and still don’t), only compounded the problem.

We did not get here overnight. Those in power have had many chances to address the issue since it became a serious threat in the late 2000s. In December 2009, this figure was eight times less than it is today at Rs90 billion.

Still not sure about circular debt? Watch this video to find out how we got to Rs1.4 trillion and why all Pakistanis should care about it.

For more explainers on Pakistan’s economy, subscribe to our Youtube channel.

Animation and design by Maria Huma.

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