Pakistan’s circular debt problem continues to defy repeated government efforts to contain it, with the stock of power-sector debt rising by Rs61 billion during 2025-26 and reaching Rs1.675 trillion by the end of June 2026. The latest increase has once again highlighted the deep-rooted inefficiencies in the electricity supply chain and raised concerns over the government’s ability to meet commitments made under the International Monetary Fund’s (IMF) Extended Fund Facility programme.
The end-June stock stood above the Rs1.614 trillion target agreed with the IMF, underscoring the gap between the government’s plans for stabilising the power sector and the realities on the ground. Despite repeated interventions, circular debt continues to accumulate, largely because payments owed within the power chain remain unsettled and several distribution companies continue to struggle with poor recoveries, high losses and operational weaknesses.
Officials said that the situation in June was particularly difficult for two major reasons. K-Electric had outstanding payments of around Rs200 billion against power purchases, while weaknesses in several distribution companies accounted for another estimated Rs100 billion. These developments have raised a fundamental question: how can the government achieve zero circular debt flow when substantial amounts due to power-sector entities remain unpaid?
The latest figures also expose the limitations of relying on short-term financial adjustments to deal with what is essentially a structural problem. Unless the underlying causes of debt accumulation are addressed, efforts to retire existing liabilities risk being followed by another buildup of arrears.
The Power Division, while briefing the Economic Coordination Committee (ECC), acknowledged that the earlier circular debt target agreed with the IMF had appeared realistic when it was formulated. At that time, international hydrocarbon prices were lower, recoveries by distribution companies had improved, technical losses were declining and interest rates were on a downward trajectory. These factors were expected to generate significant savings in subsidies and other power-sector costs. Based on those assumptions, the government had projected that circular debt would decline by around Rs779 billion, bringing the stock down to Rs1.614 trillion by the end of the last fiscal year.
The actual situation, however, turned out to be considerably more challenging. By May 31, 2026, circular debt had climbed to around Rs1.924 trillion. This figure included approximately Rs873 billion payable to banks under an approved circular debt financing arrangement. Under the financing plan, around Rs1.23 trillion was commercially secured on the recommendation of a task force established to retire accumulated power-sector debt. The cost of interest associated with this borrowing was to be passed on to consumers. The IMF eventually agreed to the arrangement, partly because the cost of financing had become more manageable following the sharp reduction in the central bank’s policy rate from 22 percent to 11.5 percent.
While the lower interest rate has eased the financial burden associated with the debt-financing arrangement, it does not resolve the fundamental problem of why circular debt continues to accumulate in the first place. Borrowing to clear old liabilities can provide temporary relief, but it cannot serve as a substitute for reforms that prevent new arrears from emerging. Another major complication concerns K-Electric’s tariff-related matters, which remain sub judice. The Power Division has said it would proactively pursue the case, recognising the importance of resolving outstanding issues involving the utility. At the same time, it proposed the use of a Technical Supplementary Grant (TSG) of approximately Rs152 billion. The proposal involved transferring funds from Demand No. 45 of the Finance Division to Demand No. 33 of the Power Division to finance specific energy and power-sector initiatives, including solarisation projects and subsidy adjustments.
The proposed financial support was considered necessary to ensure that obligations under the Circular Debt Management Plan were met and to avoid any delay or suspension in the release of the next IMF tranche.
On June 16, 2026, the ECC considered the Power Division’s request for the release of Rs152 billion as a TSG for power distribution companies. However, rather than releasing the entire amount, the committee approved a partial release of Rs54.451 billion, with the remaining Rs97.549 billion adjusted accordingly. The latest intervention is not without precedent. Governments have repeatedly relied on additional budgetary allocations, subsidy adjustments, debt restructuring and commercial borrowing to address the circular debt problem. Yet the accumulation of fresh liabilities has continued.
This recurring pattern has left analysts with little confidence that the latest measures will provide a permanent solution. The government may succeed in containing the flow of circular debt for a particular period and subsequently retire a portion of the accumulated stock, but without fundamental changes to the electricity market, the same problem is likely to reappear. The power sector therefore needs to be examined as a whole rather than through isolated financial interventions. One of the most important reforms would involve reconsidering the existing tariff differential subsidy regime. At present, taxpayers bear a substantial annual burden to bridge the difference between the cost of electricity and the tariffs charged to consumers across distribution companies. The cost of this subsidy is estimated at nearly Rs750 billion a year.
A more sustainable approach would be to allow each distribution company to determine tariffs based on its actual cost structure, while simultaneously holding management accountable for improving efficiency, reducing losses and increasing recoveries. Such a system would expose the financial weaknesses of individual companies instead of allowing inefficiencies to be repeatedly absorbed by the federal budget.
However, tariff reform alone will not be sufficient. The government must also revisit the agreements signed with Independent Power Producers (IPPs), particularly arrangements involving dollar-denominated capacity payments and pay-or-take obligations. These contracts have contributed substantially to the fixed costs of electricity generation and have limited the government’s flexibility in reducing tariffs. The challenge is to find a balance between protecting contractual obligations and ensuring that the power sector remains financially viable for consumers and the state. Any restructuring must be legally sound and negotiated transparently, but avoiding the issue altogether will only prolong the financial strain.
Pakistan’s circular debt crisis is ultimately a symptom of broader weaknesses in the power sector. Poor recoveries, technical and commercial losses, inefficient distribution companies, expensive generation, subsidy distortions and rigid contractual arrangements have combined to create a system in which financial liabilities repeatedly accumulate.
The latest rise to Rs1.675 trillion should therefore be treated as a warning rather than merely another fiscal statistic. Meeting IMF targets through temporary financial measures may provide short-term breathing space, but lasting stability will require structural reform.
Unless the government tackles the causes of circular debt instead of repeatedly financing its consequences, the cycle of accumulation, borrowing, subsidy and debt retirement will continue. A financially sustainable power sector is essential not only for meeting IMF commitments but also for reducing the burden on taxpayers, lowering electricity costs, restoring investor confidence and putting Pakistan’s economy on a more stable growth path.