Pakistan’s Circular Debt in Power Sector Surges Toward Rs. 1.9 Trillion

Pakistan’s power sector circular debt is on track to reach an alarming Rs. 1.9 trillion, reflecting renewed financial pressures in the country’s energy sector. The debt, which stood at Rs. 1.689 trillion during the first half of fiscal year 2025-26, has risen sharply to Rs. 1.889 trillion as of February 28, 2026. This rapid increase underscores ongoing challenges in managing electricity distribution and recovery mechanisms.

The significant surge in circular debt points to structural weaknesses in the sector and has intensified concerns among policymakers, investors, and international stakeholders. With liabilities tied to major power projects, the overall financial stability of the sector is under strain, demanding immediate attention and targeted policy measures.

China-Pakistan Economic Corridor Power Projects Drive Liabilities

A substantial portion of the circular debt is linked to China-Pakistan Economic Corridor (CPEC) power projects, which have now reached an all-time high liability of Rs. 543 billion. These projects, aimed at enhancing energy generation capacity, have contributed to the debt accumulation due to financing structures, high tariffs, and delayed recoveries from distribution companies.

The rising burden of CPEC-related liabilities highlights the complex interplay between energy infrastructure expansion and financial sustainability. While these projects have helped increase electricity generation, they have also increased the fiscal obligations of the government and electricity distribution companies.

Factors Contributing to Rapid Debt Increase

The nearly Rs. 200 billion jump in circular debt over just two months can be attributed to a combination of factors. Chief among them are lower recovery rates from electricity consumers and higher system losses than those targeted by the National Electric Power Regulatory Authority.

Inefficient collection mechanisms, coupled with technical and commercial losses in the distribution network, have prevented utilities from generating sufficient revenue to meet operational costs. As a result, unpaid bills and accumulated liabilities have continued to swell, placing additional pressure on both the government and the power companies.

The financial strain is further amplified by policy gaps and structural inefficiencies within the sector, making it difficult to implement timely reforms and corrective measures.

IMF Concerns and Economic Implications

The escalating circular debt has drawn attention from the International Monetary Fund, which views the issue as a critical factor affecting Pakistan’s macroeconomic stability. High debt levels in the power sector can limit fiscal space, increase reliance on government subsidies, and impact foreign exchange reserves due to payment obligations on imported fuel and project financing.

Authorities had previously committed to reducing circular debt to Rs. 1.614 trillion by the end of the current fiscal year. However, medium-term targets have now been revised upward to Rs. 1.346 trillion by June 2027, signaling the ongoing difficulty in containing the debt despite government interventions.

Government Measures to Contain Circular Debt

To manage the growing debt, the government recently approved a Rs. 200 billion technical supplementary grant, structured as equity support for distribution companies. This initiative aims to stabilize the financial position of utilities and ensure continued operations without disruption.

In addition to equity support, consumers are continuing to bear a debt service surcharge of Rs. 3.23 per unit. This surcharge is intended to cover part of the accumulated liabilities and provide immediate cash flow to distribution companies. While necessary, such measures highlight the direct impact of circular debt on electricity tariffs and end consumers.

Systemic Challenges in the Power Sector

Persistent system losses and inefficient recovery mechanisms remain central challenges in the power sector. Technical losses, including transmission inefficiencies and outdated infrastructure, contribute significantly to overall debt accumulation. Similarly, commercial losses from unpaid bills and theft exacerbate financial shortfalls, limiting the sector’s ability to cover operating costs and debt obligations.

Addressing these systemic issues is critical for sustainable debt reduction. Without improvements in billing, collection, and distribution efficiency, any government intervention may only provide temporary relief rather than long-term stability.

Role of Regulatory Oversight and Public Hearings

The National Electric Power Regulatory Authority (NEPRA) continues to play a key role in monitoring fuel charges and tariff adjustments, which directly influence the sector’s revenue generation. Public hearings and regulatory oversight are essential to ensure transparency, fair pricing, and accountability in the management of electricity distribution.

As the circular debt situation evolves, NEPRA’s decisions on fuel charges and tariffs will be closely watched by both investors and consumers. Timely adjustments are critical to balance the financial health of distribution companies while protecting consumer interests.

Looking Ahead: Policy Reforms and Energy Sector Strategy

The growing circular debt underscores the urgent need for comprehensive energy sector reforms. These may include improving operational efficiency, strengthening revenue collection, reducing system losses, and restructuring project financing arrangements.

Government coordination with international partners, including the IMF, is expected to remain a central part of these reform efforts. Sustainable solutions will require both short-term interventions to stabilize the sector and long-term strategies to improve fiscal management, regulatory oversight, and operational efficiency.

Conclusion: Rising Debt Poses Critical Challenge

Pakistan’s power sector circular debt is set to reach Rs. 1.9 trillion, highlighting the financial pressures facing the energy sector. Rising liabilities, system inefficiencies, and slow recovery mechanisms are contributing to the rapid accumulation of debt, making it a key policy concern.

While government grants, equity support, and debt surcharges provide temporary relief, structural reforms and improved regulatory oversight are essential to ensure long-term stability. Addressing these challenges is crucial not only for the financial health of the power sector but also for the broader economic stability of the country.

The coming months will be critical as authorities work to implement corrective measures, contain debt growth, and safeguard both energy supply and economic stability.

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