Pakistan’s power sector continues to face serious financial challenges, with circular debt climbing to Rs1.835 trillion by the end of June 2026. The figure is Rs221 billion higher than the ceiling of Rs1.614 trillion agreed under the country’s programmed with the International Monetary Fund (IMF), raising fresh concerns about the pace of energy sector reforms.
Despite government efforts to control the growing liabilities, several financial and operational hurdles prevented the target from being achieved.
Why Did Circular Debt Increase?
According to government officials, one of the biggest reasons behind the higher debt was the failure to recover approximately Rs200 billion from K-Electric for electricity purchases. These expected payments were considered an important part of the government’s strategy to reduce the sector’s outstanding liabilities.
In addition, several electricity distribution companies (DISCOs) performed below expectations. Lower-than-anticipated revenue collection and weaker financial results created a cash gap of nearly Rs300 billion by the close of the fiscal year.
IMF Expectations Fell Short
The IMF had anticipated a significant improvement in Pakistan’s power sector during the year. Lower global fuel prices, stronger bill recovery, reduced electricity losses, and declining interest rates were expected to reduce the government’s subsidy burden and bring circular debt down substantially.
Instead, those expected savings were not fully realized, leaving the government short of its agreed objective.
Government Measures to Reduce the Burden
The government had allocated Rs893 billion in subsidies for the power sector to support electricity generation companies and independent power producers. However, a large portion of the planned funding remained unreleased before the fiscal year ended.
To bridge the financing gap, the Power Division requested a Technical Supplementary Grant rather than seeking additional budgetary support. Officials also proposed transferring unused funds originally reserved for K-Electric’s tariff subsidy to support other distribution companies facing financial pressure.
ECC Approves Partial Relief
The Economic Coordination Committee (ECC) reviewed the proposals and approved only part of the requested financial support. While some funds were released, the amount fell short of the total requested by the Power Division.
The committee also directed authorities to continue legal proceedings regarding K-Electric’s outstanding dues. Officials remain hopeful that a court decision could help resolve the issue and improve the sector’s financial position.
Why Circular Debt Remains a Major Concern
Circular debt is one of the biggest structural problems in Pakistan’s energy sector. It develops when electricity bills are not fully recovered, government subsidies are delayed, or power companies fail to receive payments on time. As a result, unpaid obligations move through the supply chain, affecting electricity producers, fuel suppliers, banks, and distribution companies alike.
The longer these liabilities remain unresolved, the greater the pressure on the country’s public finances and energy system.
Looking Ahead
Although the government has introduced several measures to improve collections and manage subsidies, the latest figures show that much more needs to be done. Better governance, improved operational efficiency, timely subsidy payments, and stronger recovery mechanisms will be essential if Pakistan hopes to meet future IMF commitments and place the power sector on a more sustainable financial footing.
Reducing circular debt is not simply about meeting international targets—it is critical for ensuring reliable electricity supply, strengthening investor confidence, and supporting long-term economic stability.