Pakistan’s power sector has once again found itself trapped in the same vicious cycle: rising costs, inadequate subsidies, higher tariffs, fresh borrowing and, ultimately, more debt. The circular debt stock increased by around Rs61 billion during the last fiscal year, reaching approximately Rs1.67 trillion from Rs1.61 trillion a year earlier.
The increase may appear modest against the size of the energy sector, but it carries a much larger significance because it represents a failure to meet a key commitment under Pakistan’s International Monetary Fund (IMF) programme to contain the stock at Rs1.61 trillion. The Power Division has attributed the increase largely to a reduction in the federal subsidy. Of the Rs893 billion originally allocated for the power sector, around Rs98 billion was cut. Government officials argue that had the full subsidy been provided, circular debt would have declined to approximately Rs1.58 trillion rather than rising to Rs1.67 trillion.
There may be merit in that argument. But it also exposes the deeper weakness of Pakistan’s electricity system. If the sector requires substantial fiscal support merely to prevent its unpaid obligations from increasing, then the underlying problem is not simply a shortage of subsidy. It is a business model that has repeatedly failed to become financially sustainable. For decades, successive governments have attempted to fix the problem through a variety of measures. Power purchase agreements with independent power producers have been renegotiated. Inefficient generation plants have been retired or closed. Electricity tariffs have been repeatedly increased. Banks have provided fresh financing to clear accumulated obligations. Yet circular debt continues to return, much like a problem that has been temporarily concealed rather than permanently solved.
Last year, the government arranged financing of around Rs1.23 trillion from 18 banks to manage the sector’s accumulated liabilities. The transaction, serviced through a Rs3.23-per-unit surcharge imposed on electricity consumers, was described as the largest financing arrangement of its kind in the country. Such measures may provide immediate relief to the balance sheets of power-sector entities, but they do not eliminate the structural weaknesses responsible for generating new liabilities.
In effect, the debt is often shifted from one account to another. It may move from the government’s books to a bank loan, from a power company’s balance sheet to consumer surcharges, or from one public-sector entity to another. But unless the reasons behind the accumulation of unpaid bills are addressed, the liability inevitably resurfaces. There are, however, some encouraging signs. Distribution company losses, commonly referred to as Disco losses, have reportedly fallen significantly, from Rs591 billion to Rs326 billion over the past two years. This is a substantial improvement and deserves recognition. Better loss management, improved recovery and greater administrative discipline can help reduce the financial burden on the sector.
Yet the improvement in distribution losses is being undermined by the broader financial structure of the electricity market. Consumers continue to face rising tariffs, additional surcharges and recurring adjustments, while the government continues to inject money into the sector and arrange new borrowing. A system cannot be considered financially healthy when consumers are repeatedly asked to pay more while the state remains responsible for plugging persistent financial gaps.
The rapid expansion of rooftop solar has introduced another major challenge. As grid electricity becomes increasingly expensive, solar technology is becoming more affordable and accessible. Households and businesses with sufficient financial resources are therefore increasingly choosing to generate their own electricity. The growth of net-metered and off-grid solar capacity is a rational response by consumers to high electricity prices, but it creates a difficult dilemma for the national grid.
The electricity system has substantial fixed costs that do not disappear simply because some consumers reduce their dependence on the grid. When higher-income consumers and businesses shift towards solar, those costs increasingly have to be recovered from a smaller pool of grid-dependent consumers. This can push tariffs even higher for those who remain connected.
That creates a dangerous feedback loop. Higher electricity prices encourage more consumers who can afford the initial investment to install solar panels. Their departure leaves fewer consumers to finance the fixed costs of the grid. Tariffs then rise further, providing another incentive for consumers to seek alternatives. The result is an increasingly fragmented electricity market in which those least able to invest in alternative energy sources may end up carrying a disproportionate share of the system’s financial burden.
This is why Pakistan’s circular debt problem cannot be solved simply by arranging another bank loan, increasing tariffs or providing a larger subsidy. These measures may address the symptoms, but they do not close the leaks.
Those leaks are already well known: distribution losses, transmission constraints, weak bill recovery, electricity theft, dependence on expensive imported fuels and power purchase agreements based on assumptions that may no longer reflect the country’s economic realities. Unless these structural problems are addressed simultaneously, any reduction in the existing debt stock will only be temporary. The government must therefore stop viewing the electricity crisis in isolation. Power, gas and oil are deeply interconnected parts of the same energy economy. A subsidy shortfall in one area, an ill-designed tariff policy in another, or a sudden increase in the import bill can ultimately create financial pressures elsewhere in the energy chain.
Pakistan needs a comprehensive energy strategy rather than another short-term accounting exercise. Circular debt should not merely be transferred, refinanced or temporarily reduced. The objective must be to prevent new debt from accumulating in the first place.
The latest increase in circular debt should therefore be treated as a warning rather than simply another breach of an IMF target. Pakistan has spent years managing the consequences of an inefficient power system. What it now needs is the political will to address its causes. Until the system can recover its costs efficiently, reduce losses, improve governance and remain attractive to consumers without making electricity unaffordable, circular debt will continue to return—regardless of how many times it is cleared from the books.