Over the course of its four years in office, the embattled government of Pakistani Prime Minister Yousuf Raza Gilani has weathered challenges from opposition parties both new and old, threats of military intervention or coup, and most recently, a conviction sentence from Pakistan's iconoclastic judiciary for its unwillingness to seek the reopening of corruption charges against President Asif Ali Zardari -- which may eventually lead to Gilani's disqualification from office. Although the government has shown remarkable tenacity in the face of these challenges, its fights for political survival -- taking place as relations with Pakistan's principal sponsor, the United States, have plummeted -- have obscured the worsening state of the country's economic health at home.
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Pakistani leaders have, of course, long grappled with mounting debt obligations, chronic revenue shortages, and a persistent power crisis that threatens Pakistan's ability to meet its growing population's need for energy and sustained economic growth. But a new warning sign came this week when nine of the country's independent power producers invoked charges of sovereign default against the government, saying they would pursue legal suits unless they received approximately $375 million in outstanding dues, dating back to last fall, before week's end. These producers have used such brinkmanship tactics in the past to force government action, and officials are now scrambling to take out new loans to make the payments. Even if this latest challenge is resolved at the eleventh hour, however, the cumulative trend is clear: Pakistan can't keep the lights on.
Demand for energy in Pakistan now outstrips its capacity to supply electricity to industry and households by several thousand megawatts. With preliminary census projections of a population of more than 192 million and the share of the urban population rising, the challenge to power Pakistan will only grow more difficult. Already, hours-long interruptions in power have dragged down productivity in key sectors like the textile industry and sparked confrontations between rural and urban political leaders and the transportation, agricultural, and manufacturing sectors for priority access to what energy is produced.
These gaps in capacity are compounded by the "circular debt" crisis facing the power sector, which lies at the heart of this week's charges. The short version -- without attempting to untangle at length the complicated networks of government-managed and private energy suppliers, generators, and distributors involved -- of the circular-debt story is that Pakistani government regulators have habitually set end-consumer energy prices below the cost of production. But the government's inability to keep up with its pledges to make subsidy payments has left the power sector struggling and trapped in this cycle of interconnected debts.
Those difficulties have been further exacerbated by theft, leakage, and weak collections, including from the government, which routinely can't even pay its own electricity bills, let alone the subsidies. As these dues go unpaid, distribution companies are unable to repay their debts to generators for the purchase of energy, which are in turn unable to repay debts to suppliers for the purchase of the oil or natural gas by which energy is produced.
The energy crisis has been bubbling underneath the surface of Pakistan politics for several years now. Efforts to gradually bring subsidized prices more in line with actual costs inevitably draw widespread protests from those most affected and have on occasion cost the government the support of groups like the Muttahida Quami Movement -- a key swing bloc in national ruling coalitions with a strong political hold over the country's largest city, Karachi -- forcing a rollback. Last November, the government attempted to resolve the issue by assuming responsibility for approximately $3.4 billion in power-sector circular debt, transforming it into sovereign debt and borrowing heavily to do so. Private debts among producers, suppliers, and distributors have continued to mount, however, and the fundamental disconnect that drives circular debts in the power sector remains unresolved.
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