Pakistan’s power reform should be judged by the arrears it prevents

Pakistan’s electricity-sector repair will be durable when it stops generating obligations the power system cannot pay. The IMF’s May review gives a basis for asking whether the decline in the measured stock of circular debt reflects better operating cash flows or a change in how past obligations are financed. Clearing arrears can help suppliers operate and reduce immediate financing pressure. If the cost of generating and delivering electricity still exceeds cash collected and predictable public support, the gap can return even after a large settlement. IMF’s May Board decision for Pakistan · IMF’s May staff report on Pakistan, including the power-sector debt table

The liability can change hands without the gap disappearing

Circular debt describes unpaid obligations that accumulate as cash shortfalls move through the electricity chain. A distributor that receives less cash than it owes upstream can delay payments. The supplier may in turn owe fuel providers or creditors. These obligations can affect reliability and the willingness of firms to provide working capital. The IMF staff report separates the flow of new circular debt and the clearance of payment arrears when describing changes in the stock. A reduction in the stock can result from a settlement even in a period when operations continue to produce new arrears. IMF’s May staff report on Pakistan, including the power-sector debt table

For example, suppose unpaid obligations begin at 200 units. A financing operation clears 60 during the year, while the power system adds 25 in new arrears. The measured stock falls to 165, a decline of 35. The operating gap is still 25. If the settlement used borrowing backed by the government, some of the obligation may now sit elsewhere on the public balance sheet. This is stylised arithmetic. It shows why an audit should track both annual additions and liabilities elsewhere after refinancing. A lower stock can be valuable while giving an incomplete measure of reform.

The monthly cash calculation starts with energy delivered, the amount billed, the share actually paid and any public support received. Physical losses reduce billable energy. Billing problems reduce what is charged for it. Collection problems reduce the cash received. Delayed government payments can create a cash gap even where a tariff or subsidy is intended to cover costs on paper. These causes call for different responses. A general tariff increase changes the amount billed to customers already in the system. It cannot directly recover electricity lost in the network or make an overdue government payment arrive on time. IMF’s May staff report on Pakistan, including the power-sector debt table

The tariff dilemma is about incentives and distribution

Higher prices may be necessary where costs have persistently exceeded receipts. A household with few substitutes can have little room to adjust essential consumption, while an industrial customer may reduce use or look for self-supply. If a distributor loses customers that pay reliably, it can struggle to cover fixed network costs even after a tariff increase. The strength of this effect depends on who can leave the system, what charges remain due and how the tariff is structured. A financial forecast should account for collection and demand responses under alternative prices. It should also identify how lower-income consumers receive support and when the utility is reimbursed. IMF’s May Board decision for Pakistan · IMF’s May staff report on Pakistan, including the power-sector debt table

A more targeted subsidy can reduce the strain on the budget where it directs support towards essential consumption and vulnerable users. Targeting has administrative costs and can exclude people whose accounts or eligibility are hard to establish. An explicit budget payment gives the finance ministry and legislature a way to see the cost, while missed reimbursements should be reported as arrears. This improves accountability for decisions that otherwise appear as losses at the utility. It does not eliminate the need to track access and disconnections, particularly where several families share a connection.

Why clearing past arrears can still be justified

The strongest case for a settlement is that legacy debts can prevent efficient firms from operating and amplify the cost of financing fuel and repairs. A credible clearance can lower those costs and improve near-term reliability. It should be evaluated against an alternative in which suppliers remain unpaid, not just against a world with no legacy debt. The condition is that settlement be paired with measures to change the flow of new obligations. Otherwise creditors may reasonably expect another settlement, and taxpayers can end up financing recurring losses at a different point in the chain. IMF’s May staff report on Pakistan, including the power-sector debt table

External shocks complicate the test. Imported fuel costs or currency changes can increase the cost of power before prices or transfers adjust. A durable approach needs a transparent way to allocate those shocks across consumers, firms and the budget, with payment schedules the parties can meet. It should also show when an increase in costs is temporary and when it changes the long-run economics of a plant or contract. A system that can cover current bills only in unusually favourable conditions remains exposed after the legacy stock falls. IMF’s May Board decision for Pakistan

Creditors also care about whether a new liability has better terms. Replacing a short overdue payable with longer debt can reduce immediate pressure and make the schedule more transparent. It can still increase total interest or move repayment to a government entity with limited own revenue. The settlement should disclose its maturity, rate and source of repayment so its value can be compared with the old obligation. That comparison also gives taxpayers a way to see which part of the improvement comes from better finance and which from stronger operations. IMF’s May staff report on Pakistan, including the power-sector debt table

The next review should show the cash flow

Follow new arrears, settlements, subsidy reimbursements, network losses, collections and reliability in a common reporting period. Reconcile changes in the sector’s debt with any new obligations elsewhere in government. If arrears creation slows while the system continues delivering power and eligible households can still afford it, the reform has improved the underlying economics. If headline debt falls while unpaid obligations resume or budget support becomes less visible, the next review will need to identify where the gap moved. The result matters for the fiscal position as well as for the firms and households buying power. IMF’s May Board decision for Pakistan · IMF’s May staff report on Pakistan, including the power-sector debt table