Pakistan’s power sector continues to face financial pressure after circular debt increased by Rs61 billion during the fiscal year, taking the total outstanding amount to nearly Rs1.67 trillion from Rs1.61 trillion a year earlier. The increase means Pakistan has exceeded the ceiling of Rs1.61 trillion agreed under the International Monetary Fund programme, raising fresh concerns about the long-term sustainability of the country’s electricity sector and its impact on the wider economy.
According to the Power Division, the rise in circular debt was largely linked to a reduction in government subsidies for the sector. Officials stated that Rs98 billion was removed from the original allocation of Rs893 billion for electricity subsidies during the fiscal year. They maintain that without this reduction, circular debt could have declined to around Rs1.58 trillion instead of increasing. While this explanation highlights the immediate financial impact of lower government support, it also reflects the sector’s continued dependence on public funding to remain operational. A system that requires regular fiscal assistance simply to prevent new debt accumulation remains vulnerable to future financial shocks.
Over the past several years, multiple administrations have introduced reforms aimed at controlling the sector’s financial imbalance. Power purchase agreements signed with independent power producers have been renegotiated more than once in an effort to reduce capacity payments and improve financial efficiency. Older and less efficient power generation facilities have been retired, while electricity tariffs have increased significantly across different consumer categories. Financial institutions have also played a major role in supporting the sector. Last year, a financing arrangement worth Rs1.23 trillion involving 18 banks was introduced and is being serviced through a Rs3.23 per unit surcharge charged to electricity consumers. Although it was described as one of the largest financing transactions in Pakistan’s history, the latest figures indicate that these measures have not stopped fresh debt from emerging. Instead, liabilities continue to shift between financial accounts without addressing the underlying causes of the problem.
There have been some positive developments within the distribution network. Government data shows that distribution company losses have declined considerably over the past two years, falling from Rs591 billion to Rs326 billion. This improvement reflects better operational performance and stronger efforts to reduce technical and commercial losses across several distribution companies. However, these gains have not translated into lasting financial stability because the sector continues to rely on increasing electricity tariffs, substantial government subsidies and additional borrowing to meet its obligations. Consumers continue to face higher electricity bills through recurring tariff revisions and surcharges, adding further pressure on households and businesses already dealing with rising living costs.
The rapid expansion of rooftop solar installations has also introduced new financial challenges for the electricity system. As conventional grid electricity becomes increasingly expensive, solar technology continues to become more affordable, encouraging households and businesses with sufficient financial resources to generate their own electricity. The growing number of net metering users and independent solar installations reduces demand from higher paying consumers who previously contributed significantly to the grid’s revenue. This leaves the fixed operating costs of the national electricity network to be shared among a smaller group of consumers who are unable to invest in solar systems. Each new tariff increase creates additional incentive for more consumers to leave the grid, further reducing revenue and placing greater financial pressure on the remaining customer base.
Industry observers note that reducing existing circular debt through bank financing, accounting adjustments or temporary financial restructuring cannot provide a permanent solution if the structural weaknesses that generate new debt remain unresolved. Persistent distribution losses, transmission constraints, weak bill collection, electricity theft, dependence on imported fuels and long-term power purchase agreements based on outdated assumptions continue to create financial pressure throughout the system. Analysts argue that addressing these interconnected challenges will require a coordinated strategy covering the electricity, gas and petroleum sectors rather than treating each independently. Without broader reforms that improve operational efficiency and strengthen financial sustainability across the entire energy sector, Pakistan is likely to continue facing recurring circular debt regardless of short-term financial interventions.
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