“Pakistan’s Circular Debt: From the Web of Borrowings to the Inevitable Path of Reforms”

Pakistan’s circular debt crisis has become a permanent burden on the country’s economy. For decades, it has paralyzed the energy sector, slowed down industrial growth, and exerted relentless pressure on the national treasury. This crisis is not merely a financial problem it is driven by administrative weaknesses, policy failures, rampant wastage of energy at the public level, and lack of governance. Collectively, these factors have turned it into a festering wound that grows larger each passing year. Recently, the Government of Pakistan claimed that, through a historic agreement, it has taken a significant step towards ending this crisis and that within the next six years, circular debt will be permanently eradicated.

According to Federal Minister for Energy, Sardar Owais Ahmad Khan Leghari, when the present government assumed power, the circular debt stood at approximately 2.394 trillion rupees, which has now been reduced to 1.614 trillion rupees. He stated that in 2018 this debt was 1.1 trillion rupees, which rose to 2.25 trillion rupees by 2022. This indicates the grave financial burden that accumulated during previous governments due to lack of reforms in the energy sector and delayed decision-making. The current government claims that this reduction has been achieved through various measures. Economic stabilization and reduction in interest rates accounted for a decline of 175 billion rupees. Likewise, successful negotiations with Independent Power Producers (IPPs) reduced the burden by 363 billion rupees. Moreover, improvements in the transmission and distribution systems, coupled with more effective recovery mechanisms, enabled the return of 242 billion rupees.

In addition, the government has signed a financing package worth 1,200 billion rupees with a large consortium of banks, structured under Islamic financial principles. Repayment of this debt will be made by consumers through a Debt Service Surcharge of 3.23 rupees per unit, which is already included in electricity bills. The banks extended this loan at an interest rate of 0.9 percent, with a six-year repayment period. The government asserts that this arrangement will completely eliminate circular debt within six years, laying a new foundation for the energy sector.

But the pressing question remains, can the problem be permanently resolved through mere rescheduling and repayment arrangements? Experts agree that unless the root causes are addressed, the issue will resurface in one form or another. Electricity theft in Pakistan is an open secret. Transmission losses and illegal connections cause billions in annual losses. Furthermore, a large number of consumers fail to pay their bills on time, leading to a significant drop in collections. In fiscal year 2025 alone, shortfall in recoveries amounted to 132 billion rupees. Simultaneously, an outdated and inefficient distribution network remains a major concern. Losses incurred by distribution companies (DISCOs) inflicted a 265 billion-rupee loss on the national exchequer in 2025, with the DISCOs in Quetta, Peshawar, and Hyderabad performing worst.

Another undeniable reality is the stark difference between actual generation costs of electricity and the tariffs charged to consumers. The government bridges this gap through subsidies, but subsidies themselves impose a heavy strain on the budget. The International Monetary Fund (IMF) has made it clear that Pakistan must ensure no further increase in circular debt in upcoming budgets and that DISCOs’ losses must be significantly reduced. In this context, the government faces a difficult dilemma: ending subsidies will raise inflationary pressures on the masses, but maintaining subsidies will once again fuel the growth of circular debt.

Economists such as Dr. Afiya Malik argue that the new financing package ultimately shifts the burden onto the people, as they are already paying the Debt Service Surcharge and will derive no direct benefit from this arrangement. This reasoning is sound, because unless transparency and fairness are introduced into the electricity system, each new financial settlement will only be a temporary lifeline. Prime Minister Shehbaz Sharif has indicated that privatization of DISCOs will be the next step, yet privatization comes with its own complexities. While it may reduce the government’s fiscal burden, it could simultaneously make electricity more expensive, disproportionately affecting the working class.

It is also worth noting that the circular debt crisis is not just an economic issue but one tied to national security and social stability. The energy crisis has dragged industries into decline, increased unemployment, and shaken investor confidence. If Pakistan succeeds in resolving this crisis, it will not only stabilize the energy sector but also spur industrial growth and exports. This explains why global financial institutions are monitoring the situation closely.

Apart from the IMF, both the World Bank and the Asian Development Bank have repeatedly emphasized that Pakistan needs deep structural reforms in the energy sector. These reforms include diversifying energy sources, prioritizing hydropower and renewable energy, modernizing the distribution system with digital technologies, and adopting stringent measures against electricity theft. Many countries around the world have tackled similar issues through technology and strict governance. If Pakistan introduces smart metering, AI-based monitoring, and uncompromising legal enforcement, it can substantially curb losses in the energy sector.

However, all of this is possible only if there is strong political will and administrative capacity. Unfortunately, in Pakistan’s political history, energy crises have always been reduced to political slogans. Every government has claimed that it would end the crisis, but in practice, they only arranged new financial settlements to push the problem forward. This is why circular debt today still stands in the trillions. What is urgently needed now is not merely temporary relief, but a comprehensive energy policy that remains consistently enforceable for the next ten to fifteen years.

If the government enforces reforms with transparency and strict accountability, this moment could indeed prove historic. Investor confidence may revive, foreign investment in the energy sector could increase, and the public could gain access to affordable and uninterrupted electricity. But if reforms remain partial and inconsistent, this agreement will go the way of previous ones—confined to paper promises. Pakistan’s circular debt crisis is a stark reminder that without transparency in governance, public trust, and administrative competence, no financial arrangement can ever be sustainable. Therefore, this is not the time for mere debt financing it is the time for rebuilding the entire energy architecture from the ground up, otherwise, six years later, the country will once again find itself preparing for a new debt arrangement.