What is Circular Debt in Pakistan: Issues and Impacts [Article]


Power sector inefficiencies have cost this country significantly in direct budget costs in the last five years. In addition, growth has been slowed down by at least 2% per annum i.e., 10% lost growth in the last five years. Yet the problem is far from behind us. The restructuring and reform of the power sector has been held up for over two decades leading the costs to accelerate in recent years. The
important question that arises is “Why are we incapable of addressing such a big problem.” The problem requires careful study and research which can only happen if time and resources are devoted to the problem. With enough independent expertise and research for developing a body of knowledge on the required reform, a process of reform must be developed in Pakistan. There have been major
shortcomings at all levels of the reform spectrum which are split into three main areas:

1. At the policy level there is complete disarray between all entities involved. The Ministry of Water & Power, which is the main
policy maker of the sector has no roadmap set out for itself and is more reactive than proactive to power sector reforms which of
course is coupled by a lack of political will to help improve the system.

2. At the regulatory level there is an authoritarian attitude towards all entities involved. The regulator has failed to address or acknowledge problems of the power sector and is working in isolation.

3. At the entities level there is a complete breakdown of governance. Though they are being micromanaged by both the policy makers
and the regulator, the entities themselves have no aspirations of  moving ahead reforms and are happy to maintain status quo.

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Circular debt is one of the major issues in Pakistan. The Oil, Gas and Power sectors of Pakistan are the main sufferers of this giant dilemma to deal and manage the circular debt in an appropriate and suitable manner. The policy makers of Pakistan have been striving hard to find a way to solve this problem, but up till now they had not been able to find out an effective solution. Nonetheless, as a consequence of this, the circular debt in Pakistan as it is termedhas been circling around the three most important sectors of Pakistan, and the predicament is increasing day by day.

Circular debt arises when one of the two parties do not have enough cash to pay out its liabilities and pay the withholding payments to its suppliers.  This creates difficulty for the supplier to pay out its liabilities, which ultimately sets out an-unfathomable circle of debt liabilities in the economy.

In June 2011 the total circular debt reached to the level of more than Rs. 200bn, and in this year it is increasing by Rs.95 crore a day. It is a misfortune that mismanagement with regard of government owned power generation and power distribution agencies is one of the major reasons for a continuous increase in the circular debt of Pakistan. However a proper and cost effective management and organization of these companies would be able to reduce this debt position by a considerably higher level in the long run.

The significance of the management of the circular debt in Pakistan is not a secret any more. The government of Pakistan should try different types of strategies to critically fathom the core reason and find the solution that should be effective enough to positively deal with this critical issue as soon as possible.

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Thanks to http://www.pakonomy.com/2012/01/30/circular-debt-in-pakistan

Thanks to http://www.pc.gov.pk/hot%20links/2013/Final_USAID-Pakistan%20Circular%20Debt%20Report-Printed%20Mar%2025,%202013.pdf