How 2 trillion PKR in capacity payments is choking Pakistan's economy

The Capacity Payment Trap

Muzamil opens by discussing how Pakistan’s energy crisis has become an economic stranglehold. “When they had blackouts 6 to 10 hours a day, the complaint was we don’t have power,” he says. Between 2015 and 2018, the government added 7,000 megawatts of capacity. In the past four years alone, 10,000 more megawatts came online. The total installed capacity is now 43,000 megawatts, almost double what it was in 2013.

But the bills tell a different story. “In 2016-17, the capacity payments were 150 billion, 168 billion to be precise. This is now 2.1 trillion,” the economist explains. That is a tenfold increase in less than a decade. Much of this growth comes from the rupee devaluation. When Pakistan borrowed in dollars to build these plants, repayment obligations stayed fixed in dollars even as the currency fell. Capacity payments nearly tripled just from rupee depreciation.

The underlying problem: too much capacity built for too little demand. Pakistan expected 7-8% annual growth. Instead, it managed 2.5-3%. Plants sit idle, but the country must still pay fixed obligations to project developers and foreign lenders. “When you repayment, you have to pay profit by 70.5 billion dollars,” the economist says, detailing a debt schedule that locks Pakistan into payments for decades.

The Middle Class Electricity Bill

Muzamil brings up electricity costs explicitly. “Bajli’s bills are unsustainable,” he quotes, referencing the textile lobby’s public concern. Household consumers now pay 16 cents per kilowatt-hour. Compare this to India and Bangladesh, where rates range from 4 to 7 cents. “Our average consumer on average around 16 cents per unit,” the economist confirms. “This is back breaking anyway.”

The physicist and mathematician know the feedback loop: higher prices drive down consumption, which spreads the fixed capacity costs across fewer units, pushing prices higher still. People reduce usage. Recovery drops. Capacity payments rise. The cycle feeds itself.

“Where there is no real income sustained or grow. It’s actually gotten less and you are making further tax,” Muzamil observes. The salaried middle class, already squeezed by inflation, now faces both higher taxes and rising utility bills. Meanwhile, retail and agricultural sectors received exemptions. The rich pay less tax because they have political power. The middle class pays more on both ends.

Why Default Isn’t Crazy

The economist doesn’t flinch at the word. “We don’t want to see that real structural change or real crisis and for that we just keep borrowing, keep it, keep the status quo going.” Pakistan is $26 billion behind on annual debt repayment alone, and that number grows as rollovers happen at higher interest rates.

Muzamil asks what would happen if Pakistan actually defaulted. “When you default, then automatically, you know, there’s a series of events that happen after that,” the economist says carefully. But he pushes back on fear-mongering. Lebanon defaulted but its problems came from politics, not economics. Sri Lanka defaulted and “they’re getting back on the growth path.” Zambia did the same.

“At some point, we’ll hit the wall anyway,” the economist argues. Continuing current policy also contracts the economy, but slower and more painfully. Import restrictions shrink GDP. Talent leaves the country. Remittances can’t replace real productive capacity. “The fact of the matter is Pakistan might actually see itself once it gets into a moratorium, you start actually seeing some benefits because we are really assuming that the worst will happen.”

The Structural Failures Nobody Addresses

Muzamil pushes harder. Why not renegotiate with IPP developers? The economist explains that those contracts are mostly sovereign-guaranteed in international law. Changing the terms, even slightly, counts as default. The debt component is borrowed from foreign banks. The equity component runs 25 years. One report Muzamil cites showed most projects made back their investment in just 2-3 years due to rupee devaluation.

The real issue: Pakistan will not grow at competitive electricity prices. “Growth on the back of uncompetitive energy prices cannot happen. Like, it’s never happened anywhere else in the world. It’s not going to happen here as well.” The country built for growth that never came, then squeezed the economy to service the debt.

Without reform, “we will be stuck in this zero to two percent growth for I don’t know how long and that is unsustainable simply because our population growth is two percent.” Youth bulge becomes generational despair. Talent flees. The diaspora sends remittances, but remittances are not manufacturing jobs.

The Societal Reckoning

Toward the close, the economist outlines the darker path. “There is a snowballing effect taking place. We are not reducing our debt levels so this is a we are remaining in a crisis.” When people lose hope in growth, they don’t stay docile. Recent unrest over electricity costs shows what’s coming. The government resorted to concessions because strikes and civil disobedience became costly.

“I think there are we’re heading towards multiple different levels of breakdowns. They may not all happen at the same time but they’ll happen in different areas different times and then governance becomes more and more difficult.” Coercion replaces persuasion. That breeds resentment. The cycle worsens.

Muzamil closes with an analogy: “It’s like your children with drugs or heroin. And you don’t want to give them to rehab. Because if you don’t know that, they will give you a rating.” You must accept short-term pain to address the root problem. But society needs a plan, not panic. Restructuring worked for Sri Lanka and Zambia when governments were honest with their people and creditors negotiated meaningful terms.

“This is not with the view of creating chaos and creating a disruption, it is actually to with a hope that we have further growth once we have given ourselves some space.” Pakistan can take that path. Or it can wait until default chooses it.