Circular Debt—an Unfortunate Misnomer

2020:20
Author: Afia Malik
JEL Classification : G38, H11, L94
Publication Year : 2020

The electricity sector in Pakistan has suffered huge losses (cumulated loss of Rs 5 trillion about 12 percent of current GDP). The nomenclature of “circular debt” has confused policy-makers to think that it is a mere accounting problem and not a result of deep structural issues that need to be carefully unravelled. Besides creating budgetary issues it has badly affected the overall sustainability of the electricity supply chain for many years. The study finds that not only governance issues, operational and commercial inefficiencies in the system; it is the lack of effective planning and flawed policies on the generation side, and distortions in our pricing strategy accompanied with irrational subsidies on the demand side, that are contributing to this financial liability.