The issue of Pakistan’s circular debt is a knot that is not confined merely to the energy sector or the electricity distribution companies, but directly affects the entire structure of the national economy. Looking at the situation as of September 2025, this crisis has assumed the shape of a major challenge for Pakistan on both domestic and external fronts. Circular debt is essentially the outstanding payments stuck between power producers, fuel suppliers, and distribution companies, which ultimately become a burden on the national exchequer. Alongside this, the government’s repeated reliance on short-term borrowings, and the taking of new loans to retire old ones, creates a vicious cycle that seems increasingly difficult to escape.
The history of circular debt in the energy sector spans almost two decades. After the global financial crisis of 2007–2008, Pakistan’s economy too could not remain insulated from its impact. Imported fuel became expensive, electricity tariffs could not be adjusted to realistic levels, and the losses of distribution companies increased. This was the time when circular debt first entered the national discourse. At that point, the burden was around 400 billion rupees, which later ballooned into trillions. Today, according to estimates, the volume of circular debt in the energy sector exceeds 2 trillion rupees, equivalent to around seven to eight billion dollars. A large portion of this amount is payable to private power producers, while the arrears of fuel suppliers and distribution companies remain a separate burden.
The key question here is: why do these debts continue to escalate? The fundamental reason remains the gap between the actual cost of electricity generation and the tariffs recovered from consumers. When the government, under political or social pressure, refrains from timely tariff hikes, the difference is either covered through subsidies or postponed as arrears into the future. The budgetary allocation for subsidies remains inadequate, and thus this burden piles up in the form of debt. Alongside this, the inefficiency of distribution companies, line losses as high as 18 to 20 percent, and the entrenched practice of electricity theft further exacerbate the problem.
A second layer of circular debt manifests in the form of aggregate national debt. Pakistan’s total public debt is reported to be between 82 and 85 trillion rupees, approximately 75 to 80 percent of GDP. Of this, nearly 130 billion dollars comprise external debt owed to various countries and institutions. Merely servicing this debt requires 8 to 9 trillion rupees annually, which stands as the largest single expenditure item in the national budget. When such a massive portion of a country’s resources is spent solely on interest payments and principal repayments, investment in education, healthcare, employment generation, and development projects becomes almost impossible. This is precisely why Pakistan’s socio-economic development remains stalled, and public discontent is mounting.
Globally too, circumstances are not favorable for Pakistan. Over the last two years, the U.S. Federal Reserve and the European Central Bank have kept interest rates at elevated levels to curb inflation. As a result, global capital has become more expensive, and borrowing countries have come under intensified pressure. Countries like Pakistan, which depend on installment-based financing and repeated rollovers, are direct victims of this situation. Simultaneously, ongoing tensions in the Middle East and fluctuations in oil prices have further inflated the import bill. The Pakistani rupee has come under strain, and the cost of external debt has increased. All these factors combined have multiplied Pakistan’s financial difficulties severalfold.
The question also arises: what did other countries do in such situations? For instance, after facing a severe debt crisis in 2001, Turkey implemented strict reforms. It broadened its tax base, promoted private sector investment, and gradually shifted the energy sector onto commercial foundations. Egypt, too, after 2016 under an IMF program, reduced subsidies, liberalized its exchange rate, and expanded its tax net. In Africa, the cases of Ghana and Nigeria are instructive, where energy subsidy programs were targeted more narrowly, and privatization was employed to reduce debt burdens. Pakistan, too, if it undertakes such structural reforms in a timely and sustainable manner, can bring the circular debt crisis under control.
The real challenge for Pakistan, however, is political stability and policy continuity. Each incoming government abandons earlier plans midway or resorts merely to temporary relief by artificially reducing tariffs. While this may provide the public short-term respite, the crisis deepens further. This is precisely why international financial institutions impose stringent conditions on Pakistan. The IMF repeatedly insists that electricity and gas tariffs must be adjusted to reflect actual costs, subsidies restricted to only the deserving, the tax net widened, and the fiscal deficit reduced. But political governments, fearing public backlash, fail to fully implement these conditions.
The prospects ahead diverge along two paths. One is a path of hope: the government immediately embarks on a phased correction of energy tariffs, restricts subsidies exclusively to vulnerable groups, transforms distribution companies into private or semi-autonomous entities, and digitalizes the tax system. Simultaneously, it reduces reliance on short-term debt through the issuance of long-term bonds and reschedules external debt on better terms. In such a scenario, it may be possible to gradually lessen the burden of circular debt and set the economy on a sustainable course.
The second path, however, appears more realistic under the shadows of political instability, lack of coherent policies, and global financial pressures. If reforms are delayed or abandoned, the debt burden will intensify further. In such circumstances, more than half of the budget will be consumed by debt servicing, while social sectors will face further neglect. Inflation, unemployment, and poverty will rise, and social discontent will deepen. This is a trajectory Pakistan can no longer afford.
As practical measures, the first step must be a transparent audit of circular debt to identify actual liabilities and unnecessary arrears. Secondly, subsidies must be fully targeted, with non-deserving consumers excluded. Thirdly, the performance of distribution companies should be enhanced through modern technology, smart metering, and privatization measures. In the fiscal arena, the income tax net must be expanded to bring large privileged classes into the tax base. For debt management, reliance on short-term borrowing must be reduced, and long-term investment bonds issued to allow the economy breathing space.
The final and most crucial aspect is that all of this is only possible through political will and public trust. The burden of reforms must not fall uniformly on low-income groups, rather, social safety nets should be expanded to shield them. Transparency, accountability, and public dialogue are the key factors that can make reforms successful. Otherwise, this vicious cycle of debt will keep engulfing us again and again.
It can thus be said that circular debt is a perpetual trial for Pakistan’s economy, but it is not an insoluble problem. If the political leadership makes tough decisions with wisdom, realism, and consistency, this crisis can be transformed into an opportunity. Otherwise, this burden will continue to be passed onto future generations, and Pakistan’s economic sovereignty will remain perpetually at risk. The demand of the moment is that we prioritize long-term stability over short-lived conveniences, otherwise, circular debt will keep knocking at our doors with ever-greater weight.
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