Key Takeaways:
• Pakistan’s electricity crisis is at the core of its worsening debt problem
• Capacity payments to power producers are draining the country’s finances
• Poor planning has led to excess power generation capacity
• The energy sector’s issues are affecting millions of Pakistanis
Yousuf Nazar, former head of Citigroup’s emerging markets investments, has provided a comprehensive analysis of Pakistan’s electricity crisis in his recent article. His insights reveal how deeply the country’s energy sector problems are intertwined with its economic struggles.
Nazar points out that “Pakistan is in a debt trap. The interest paid on federal government debt as a percentage of net revenues was 120.9% in 2023-24, the worst in the world, much higher than Sri Lanka’s ratio at 78%, which was the second highest in the world.”
The energy sector plays a significant role in this financial quagmire. Nazar explains, “Pakistan’s current power generation installed capacity is 45,885 MW and the dependable generation capacity is around 43,749 MW. During Pakistan’s summers, the total power demand surges to over 29,000 MW, while in winter, it stands at a comparatively modest 12,000 MW.”
This overcapacity has led to substantial “capacity payments” to power producers. Nazar reveals, “During the FY 2023-24, the government made capacity payments of around Rs 2.1 trillion to the IPPs. This staggering amount represented about 1.9% of Pakistan’s GDP.”
The author criticizes past decisions, stating, “The strategy of building infrastructure through projects that carry government-guaranteed profits, and which are financed largely through foreign currency debt, has now fallen apart.”
Nazar highlights some particularly problematic cases: “Kot Adhu Power Limited (KAPCO) produced zero electricity in FY 2023-24 but was paid Rs22.17 billion as capacity charges.” He also mentions the Port Qasim Power Project, which “operated at only 18% capacity during 2023-24, but received the second-highest capacity payment of Rs.121.8 billion.”
Also Read: Pakistan Pushes Chinese Power Producers to to Shift to Local Coal
The article points out that “45% of the capacity payments in 2023-24 were made to the government-owned plants, 15% to the private parties (mostly local) and 40% to the Chinese IPPs.” Nazar emphasizes that “China is Pakistan’s single largest creditor. About 28% of Pakistan’s official external debt is owed to China.”
It will not be easy as the political and economic elite has been the biggest beneficiary of the status quo. It will be a tough battle. But then it is worth remembering that no battle is tougher than that of the ordinary citizens of Pakistan who have lived through the nightmare created by the energy policies pursued over the last two and a half decades.
Nazar calls for a more transparent and expert-driven approach to solving Pakistan’s energy and debt issues. He suggests “forming a high-powered energy and debt task force to prepare a report on the existing situation, and submit recommendations to implement a program of debt and energy reforms.”
The author concludes that “The solution lies in public ownership (preferably through companies listed on the stock exchanges) with management expertise drawn from the private sector, as we have seen in South Korea, Singapore, and several other countries.”
Nazar’s final words are particularly poignant: “It will not be easy as the political and economic elite has been the biggest beneficiary of the status quo. It will be a tough battle. But then it is worth remembering that no battle is tougher than that of the ordinary citizens of Pakistan who have lived through the nightmare created by the energy policies pursued over the last two and a half decades.”
