Few issues embody Pakistan’s fiscal dysfunction as starkly as the country’s ballooning circular debt in the energy sector. What began as a temporary mismatch between costs and tariffs has now spiraled into a structural crisis, draining the national exchequer, crippling energy companies, and undermining the credibility of governance. Today, circular debt stands as one of the greatest obstacles to economic stability, investment, and growth.
As of March 2025, Pakistan’s power sector circular debt alone has crossed Rs. 2.396 trillion, according to government data. When liabilities from petroleum and gas are included, the overall energy sector debt balloons to over Rs. 5 trillion, an astronomical figure that continues to climb each year. This massive accumulation reflects decades of policy missteps, tariff mismatches, inefficiency, and weak governance that successive governments have failed to resolve. At its core, circular debt is the unpaid amount in the energy supply chain. When power distribution companies (DISCOs) sell electricity at tariffs lower than cost, or fail to collect full revenue due to theft and inefficiencies, they cannot pay independent power producers (IPPs). The IPPs, in turn, cannot pay fuel suppliers, and the backlog snowballs into circular debt. For years, governments have patched the system with subsidies and periodic injections of borrowed funds. But these bailouts provide only temporary relief, leaving the structural flaws intact. One of the main drivers of circular debt is the persistent gap between generation costs and consumer tariffs. Political reluctance to raise power tariffs in line with costs, particularly in an environment of high inflation, has created chronic under-recovery. While subsidies are intended to protect the poor, they often benefit wealthier households as well, and rarely reach the most vulnerable efficiently. Every rupee of subsidy not covered in the budget adds directly to circular debt.
For years, governments have patched the system with subsidies and periodic injections of borrowed funds. But these bailouts provide only temporary relief
Another driver is the poor performance of distribution companies. High transmission and distribution (T&D) losses-averaging around 16-17 percent-exceed allowable benchmarks and represent billions in lost revenue. Electricity theft, under-billing, and weak enforcement further erode collections. Even where bills are issued, recovery rates remain poor in several regions, creating systemic shortfalls that cascade up the supply chain. The heavy reliance on imported fuels has also aggravated the crisis. Global spikes in oil, coal, and LNG prices directly inflate generation costs. With a weak rupee, the cost of imports rises further, but tariffs are not adjusted in time to reflect these changes. The result is yet another layer of arrears that feed the circular debt monster. The fiscal consequences are devastating. To clear mounting liabilities, the government frequently injects massive sums into the energy sector. In June 2025, for example, Pakistan arranged a Shariah-compliant financing facility of Rs. 1.275 trillion (USD 4.5 billion) to plug the sector’s shortfall. While structured to avoid adding to sovereign public debt, such bailouts still divert scarce fiscal resources away from health, education, and infrastructure. They also perpetuate a culture of non-reform, where stakeholders expect the government to repeatedly step in.
Beyond fiscal strain, circular debt undermines energy security itself. IPPs facing unpaid bills scale back generation, triggering load-shedding and supply disruptions. Fuel suppliers hesitate to extend credit, fearing delayed payments. The credibility of the sector erodes with investors, both domestic and international, making it harder for Pakistan to attract fresh energy investment or renegotiate power purchase agreements.
The broader economic impact is equally severe. Power shortages reduce industrial productivity, discourage foreign investment, and increase the cost of doing business. Circular debt is not just a technical issue-it is a growth killer. By choking the energy supply chain, it strangles the very lifeblood of economic activity.
So why has the problem persisted for decades? The answer lies in weak governance and lack of political will. Every government promises to tackle circular debt, yet few have taken the difficult steps needed to resolve it permanently. Tariff rationalization is delayed due to fear of public backlash. Distribution companies remain unreformed, plagued by inefficiency and political interference. Accountability for theft and non-recovery is weak, with powerful groups often shielded from enforcement. Meanwhile, subsidies continue to be doled out without proper targeting, adding new liabilities every year.
Breaking this cycle requires decisive reforms. First, tariffs must be rationalized in line with costs, but subsidies should be targeted narrowly to protect only the poorest households. Technology such as smart meters and prepaid systems can help reduce theft and improve billing accuracy. Expanding renewable energy capacity can cut dependence on volatile imported fuels and stabilize generation costs. Second, distribution companies need urgent restructuring. Private-sector participation, whether through management contracts or partial privatization, could inject efficiency and accountability. High-loss regions require special enforcement drives, backed by political will, to improve recoveries. Third, transparency in the energy sector must be enhanced. Publishing real-time data on circular debt flows, subsidy allocations, and recovery rates can build accountability. Strengthening the role of regulators like NEPRA to enforce compliance is also essential.
Finally, circular debt cannot be solved in isolation. It is deeply tied to fiscal discipline, governance, and economic structure. As long as deficits remain high, subsidies underfunded, and governance weak, circular debt will keep resurfacing. Resolving it requires aligning fiscal, monetary, and energy policies under a single reform vision. The stakes could not be higher. If left unchecked, circular debt will continue to grow, draining billions from the treasury, undermining investor confidence, and crippling Pakistan’s energy future. But with political courage, smart reforms, and a commitment to transparency, Pakistan can break free from this vicious cycle.
The writer is the director-general (Punjab Sahulat Bazaars Authority)