Introduction
Circular debt is the shortfall in collections by an entity which causes it to withhold payments to its suppliers spreading the cash crunch to the whole supply chain. More specifically, with regards to Pakistan’s power sector, circular debt refers to unpaid bills by DISCOs1 to key players especially: oil companies, gas companies, IPPs2, and WAPDA.3 These payables in the power sector of Pakistan are Rs. 313 billion as of end-June 2015.
However, circular debt is not limited to this shortfall in payables alone. As explained by the Finance Minister Ishaq Dar, in addition to these payables, circular debt also includes residual from payables clearance of June and July 2013, a disputed amount with the IPPs, distribution companies’ non-recovery and penalties levied on past non-payment and transmission and distribution losses that are not recognized by the regulator. Once these additions are accounted for, stock of circular debt increases to Rs. 648 billion 6 as of end-June 2015 which is approximately 6 percent of GDP.
