Pakistan’s power sector circular debt rose by Rs61 billion in fiscal year 2025-26, pushing the stock to Rs1.675 trillion by end-June against an International Monetary Fund target of Rs1.614 trillion under the Extended Fund Facility programme. The shortfall, detailed in Power Division briefings to the Economic Coordination Committee, underscores persistent sectoral inefficiencies that have plagued the energy chain for nearly two decades and threaten further delays in external financing.
Circular debt represents the cascading shortfall of payments across the power supply chain. Distribution companies (DISCOs) fail to collect full revenues from consumers due to theft, technical losses and weak billing; the government delays or underfunds tariff differential subsidies; and the Central Power Purchasing Agency cannot fully pay generators, Independent Power Producers (IPPs) and fuel suppliers. Late-payment surcharges then compound the arrears. The result is a liquidity trap that raises generation costs, deters investment and forces periodic taxpayer-funded bailouts or bank refinancing whose interest ultimately lands on consumers.
The roots stretch to the mid-1990s. Facing chronic shortages, Pakistan’s 1994 Power Policy invited private investment through IPPs under cost-plus tariffs, generous returns and “take-or-pay” contracts denominated in dollars. Capacity payments were guaranteed whether or not power was dispatched. These arrangements attracted roughly $5 billion and added thousands of megawatts, but they locked in high fixed costs indexed to the exchange rate and imported fuel prices. When global oil prices surged after 2005 and the rupee depreciated, generation costs outstripped the government-notified tariffs that successive administrations kept artificially low for political reasons. By 2006 the first visible circular-debt stock of about Rs111 billion had emerged.
The trajectory since has been one of repeated accumulation interrupted by temporary clearances. Debt climbed steadily through the late 2000s, reaching hundreds of billions. In 2013 the incoming government injected roughly Rs480 billion to clear the stock, only for it to rebuild. Further peaks approached or exceeded Rs2.3–2.4 trillion in the early 2020s. Efforts to park liabilities in Power Holding Private Limited, issue energy sukuks and refinance through commercial banks provided breathing space but transferred interest costs rather than eliminating the underlying flow. By May 2026 the stock had swollen to Rs1.924 trillion, including Rs873 billion payable to banks under an approved financing facility that secured Rs1.23 trillion commercially—facilitated by the decline in the discount rate from 22 percent to 11.5 percent, a move the IMF accepted.
June 2026 proved particularly revealing. The Power Division had earlier regarded the IMF stock target of Rs1.614 trillion as realistic, citing lower international hydrocarbon prices, improved recoveries, reduced technical losses and falling interest rates that were expected to generate subsidy savings of Rs779 billion. Reality diverged sharply. Non-payment by K-Electric of roughly Rs200 billion against power purchases, combined with weak performance by some DISCOs that accounted for another Rs100 billion, drove the overshoot. K-Electric tariffs remain sub judice; the Division pledged proactive pursuit of the case yet recommended a technical supplementary grant of about Rs152 billion to fund solarisation or subsidy adjustments and avert any delay or suspension of the next IMF tranche. On 16 June the ECC approved only a partial release of Rs54.451 billion, adjusting the balance of Rs97.549 billion.
Analysts note that such stop-gap measures have been proposed and implemented before with little lasting effect. The accumulation of new debt continues because structural problems remain unaddressed: high transmission and distribution losses well above NEPRA targets, recovery shortfalls, uniform national tariffs that mask cost differences among DISCOs, and rigid IPP contracts featuring dollar-linked capacity payments that cannot easily be renegotiated.
A durable solution requires holistic reform rather than repeated liquidity injections. First, the government should abandon the tariff differential subsidy that costs taxpayers nearly Rs750 billion annually. Allowing each DISCO to set its own tariff according to its actual cost structure would create price signals that reward efficiency and penalise losses, while targeting residual subsidies only to the most vulnerable consumers. Second, the flawed deals with IPPs—particularly the take-or-pay provisions denominated in dollars—must be revisited where legally feasible, shifting towards take-and-pay models and greater reliance on competitive bilateral contracting under the Competitive Trading Bilateral Contract Market framework. Third, the working of DISCOs must improve through professional management, accelerated rollout of advanced metering, strict enforcement against theft, and eventual privatisation or competitive franchising of underperforming entities. Fourth, the generation mix should continue shifting toward indigenous resources—hydel, solar, wind and Thar coal—to reduce exposure to imported fuel price and exchange-rate shocks.
Financing the existing stock can be optimised by converting high-cost circular-debt liabilities into cheaper longer-term public or sovereign-guaranteed instruments serviced through a transparent, time-bound surcharge, as partially already underway. Yet without stemming the annual flow to zero, any stock reduction will prove temporary. Past experience shows that political reluctance to pass through true costs or confront vested interests in the distribution network repeatedly undermines technical plans.
Pakistan’s energy circular debt is no longer a technical accounting problem; it is a serious constraint on fiscal space, industrial competitiveness and macroeconomic stability. This calls for urgent remedial action, including lowering tariff, stoppage of theft, strict accountability at the distribution level and, most important of all, rationalising IPPs contracts that have hobbled the normal working of the power sector over the last three decades.