Rubina Ilyas

The specter of circular debt that has been haunting Pakistan’s power sector for a long time, seems to be partly stabilized with a total stock standing at Rs 1.614 trillion as of June 2025 (Ministry of Energy, 2025).  It represents a significant cut over last year (2022–23), which was Rs 2.393 trillion from prior FY, a decline of Rs 780 billion. Over the first 16 months of the incumbent government (March 2024–June 2025), the debt was brought down from Rs 2.679 trillion to Rs 1.614 trillion — a drop of about Rs 1.065 trillion (Ministry of Finance, 2025). This unanticipated advancement is firstly the result of the breakthrough deal made by the Government of Pakistan with 18 leading commercial banks for Rs 1.275 trillion Islamic financing. The government is now expected to repay this facility in 24 quarterly instalments over six years, at a rate linked to the three-month KIBOR minus 0.9 percent (Pakistan Banks Association, PBA). The payments would retire Rs 683 billion payable to Power Holding Limited (PHL) and clear arrears of Rs 569 billion worth to Independent Power Producers (IPPs), bringing down the sector’s circular debt to around Rs 561 billion. Secondly, the systematic policy given by the Finance Ministry to allow the Debt Service Surcharge (DSS) of Rs 3.23/kWh to be utilized only for debt servicing, which not only brought fiscal transparency but also seriousness to the unprecedented government finances. Prior to these measures, earlier in the fiscal year 2024-25 (FY25), circular debt had been recorded at Rs 2.4 trillion (approximately) by end-March 2025.

Yet, this doesn’t indicate that the consumers will now enjoy tariff reductions. While a financial injection by the government may be the short-term solution to prevent the crisis in it still doesn’t solve the circular debt problem. Even if it relieves some political pressure today, the cost will ultimately be passed directly on to the consumer — through future bills and tariffs, i.e., the Debt Service Surcharge (DSS) of Rs 3.23 per unit for the next six years. While the loan may stave off pressure in the near term, unless these fundamental inefficiencies —losses, low levels of billing and a monolithic fixed cost structure — are tackled head-on, they will continue to weigh on the sector. Moreover, due to the IMF’s stringent cost-recovery mandates, electricity prices will continue to be burdened by internal system inefficiencies. The IMF has demanded the end of a previous 10 percent ceiling on this surcharge, ensuring ultimately increased bills for users.

The already beleaguered power sector is heading for some short-term relief and long-term pain. The power sector is still plagued by high non-technical and technical losses in transmission and distribution, poor collection of overdue bills, an unbalanced cross-subsidy structure, the dependence on imported fuels, and the stagnation of new domestic power generation. Unless there are drastic changes in DISCO performance, loss reduction and bill recovery measures, the borrowing will reemerge. The consequences for ordinary consumers are straightforward: years of increased electricity bills and levies to pay for the bailout. The July debt deal is, in essence, an unavoidable but uneasy solution. The implications are very clear: years of elevated electricity tariffs and surcharges that will finance the bailout but do little to fix systemic inefficiencies. While this does provide some breathing room for the power sector, it will be paid for by households and industry for years to come. Unless governance reforms, infrastructure upgrades, and accountability in distribution companies are pursued in parallel, this relief package may simply reset the clock on a recurring crisis.

In the absence of a decisive action to upgrade grid and enforcement aggressively on the usage of non-fossil fuel generation, energy revenues, governance on profit and cost regulation, and the industry’s short-sighted dependence on circular debt will continue to erode any recent achievements. The government action has bought itself time and credibility for the time being– but real test lies ahead: can Pakistan turn this fleeting fix into a sustainable, cost-effective power future?

(The writer is a Research Economist at Pakistan Institute of Development Economics (PIDE). She can be reached at [email protected])