The term “Circular Debt” has become a haunting fixture in Pakistan’s economic lexicon. It represents a systemic failure where the inability of one entity to pay its dues triggers a chain reaction of defaults across the entire energy supply chain—from consumers to distribution companies (DISCOs), power producers (IPPs), and fuel suppliers.
As of late 2025 and entering 2026, the crisis remains the single largest threat to Pakistan’s fiscal stability, despite recent landmark restructuring efforts.
1. The Current State: By the Numbers (2025-2026)
Following a historic PKR 1.225 trillion settlement and restructuring deal in late 2025, the stock of circular debt saw a significant technical reduction, though the underlying “flow” (new debt being added) persists.
- Total Circular Debt (Power Sector): Stood at approximately PKR 1.693 trillion as of September 2025, following a major stock clearance drive that reduced it from a peak of nearly PKR 2.4 trillion earlier in the year.
- Payables to Power Producers: Roughly PKR 944 billion (as of Q1 FY26).
- Amount Parked in Power Holding Limited (PHL): Approximately PKR 660 billion.
- Gas Sector Debt: An additional PKR 650 billion+ remains unresolved in the gas supply chain.
2. Key Drivers of the Crisis
The circular debt is not just a “payment issue”; it is a symptom of deep structural inefficiencies.
A. Transmission & Distribution (T&D) Losses
Pakistan’s aging grid suffers from massive technical losses and rampant electricity theft. In 2025, DISCOs reported losses exceeding 20% of total supplied power, far above the international benchmark of 5–8%.
B. Capacity Payments
A significant portion of the tariff goes toward “Capacity Charges”—payments made to IPPs to keep plants available, even if no electricity is generated. With over 45,000 MW of installed capacity but an average utilization of only 34%, consumers are essentially paying for idle power plants.
C. Low Bill Recovery
Recovery rates vary wildly across the country. While some DISCOs achieve 90%+, others in regions like Tribal Areas or parts of Sindh and Balochistan struggle to recover even 40-50% of billed amounts.
D. Delayed Tariffs and Subsidies
The gap between the cost of generation (notified by NEPRA) and the tariff charged to consumers (decided by the government) often remains unbridged, requiring subsidies that the government frequently fails to release on time.
The term “Circular Debt” has become a haunting fixture in Pakistan’s economic lexicon. It represents a systemic failure where the inability of one entity to pay its dues triggers a chain reaction of defaults across the entire energy supply chain—from consumers to distribution companies (DISCOs), power producers (IPPs), and fuel suppliers.
As of late 2025 and entering 2026, the crisis remains the single largest threat to Pakistan’s fiscal stability, despite recent landmark restructuring efforts.
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1. The Current State: By the Numbers (2025-2026)
Following a historic PKR 1.225 trillion settlement and restructuring deal in late 2025, the stock of circular debt saw a significant technical reduction, though the underlying “flow” (new debt being added) persists.
- Total Circular Debt (Power Sector): Stood at approximately PKR 1.693 trillion as of September 2025, following a major stock clearance drive that reduced it from a peak of nearly PKR 2.4 trillion earlier in the year.
- Payables to Power Producers: Roughly PKR 944 billion (as of Q1 FY26).
- Amount Parked in Power Holding Limited (PHL): Approximately PKR 660 billion.
- Gas Sector Debt: An additional PKR 650 billion+ remains unresolved in the gas supply chain.
2. Key Drivers of the Crisis
The circular debt is not just a “payment issue”; it is a symptom of deep structural inefficiencies.
A. Transmission & Distribution (T&D) Losses
Pakistan’s aging grid suffers from massive technical losses and rampant electricity theft. In 2025, DISCOs reported losses exceeding 20% of total supplied power, far above the international benchmark of 5–8%.
B. Capacity Payments
A significant portion of the tariff goes toward “Capacity Charges”—payments made to IPPs to keep plants available, even if no electricity is generated. With over 45,000 MW of installed capacity but an average utilization of only 34%, consumers are essentially paying for idle power plants.
C. Low Bill Recovery
Recovery rates vary wildly across the country. While some DISCOs achieve 90%+, others in regions like Tribal Areas or parts of Sindh and Balochistan struggle to recover even 40-50% of billed amounts.
D. Delayed Tariffs and Subsidies
The gap between the cost of generation (notified by NEPRA) and the tariff charged to consumers (decided by the government) often remains unbridged, requiring subsidies that the government frequently fails to release on time.
3. The 2025 Landmark Restructuring Deal
In September 2025, the government, in collaboration with the Pakistan Banks Association (PBA), executed the largest financial transaction in the country’s history to address the debt stock.
- Restructuring: PKR 660 billion in existing loans were restructured over 6 years.
- Fresh Financing: PKR 565 billion in new loans were raised to pay off IPPs.
- Cost Reduction: Banks agreed to a concessional rate of KIBOR minus 90 basis points, saving the government billions in markup.
- The Surcharge: The existing PKR 3.23 per unit Debt Service Surcharge (DSS) is now being ring-fenced specifically to repay this bank debt rather than disappearing into the general budget.
4. The Way Forward: Privatization and Reform
To prevent the debt from ballooning back to 2024 levels, the government has accelerated reforms under IMF and World Bank mandates:
- Privatization of DISCOs: In early 2026, the government officially launched the privatization process for five major distribution companies to bring in private investment and reduce theft.
- Solarization and Anti-Theft: Aggressive crackdowns on “Kunda” (illegal) connections and a shift toward solar energy are aimed at reducing the burden on the national grid.
- Renegotiating IPP Contracts: The government continues to seek revisions to older Power Purchase Agreements (PPAs) to shift from “take-or-pay” to “take-and-pay” models.
Conclusion
Pakistan’s circular debt is a “leaking bucket.” While the 2025 restructuring fixed the “stock” of the debt, the “flow” can only be stopped by improving DISCO governance and modernizing the grid. Without these structural changes, the circular debt will continue to consume nearly 2% of Pakistan’s GDP annually.
