Pakistan’s power sector has long been plagued by circular debt -- arrears accumulating among generation companies, fuel suppliers, distribution companies and the government (subsidies, payments, etc.).
CIRCULAR DEBT
Pakistan’s power sector has long been plagued by circular debt -- arrears accumulating among generation companies, fuel suppliers, distribution companies and the government (subsidies, payments, etc.).
As of mid-2025, the stock of circular debt was reported at around Rs1.66 trillion (with periodic further accumulation). To address this, the federal government has arranged a financing (or restructuring) deal of Rs1.225 trillion via a consortium of 18 commercial banks.
This is a milestone deal with the potential to reset the trajectory of Pakistan’s power sector. But it's not a guarantee of success. The following 1–2 years will be telling: if collections improve, losses are reduced and new debt accumulation is contained, then this could be seen years later as a turning point.
This deal gives a structured path to clear the existing debt stock, which is a big step. However, unless the root causes are addressed, new circular debt will likely continue, albeit hopefully at a slower or more manageable pace. Thus, it can significantly slow or stop further runaway accumulation if reforms are serious and enforced, but it is not a magic bullet that by itself guarantees zero further circular debt.
The facility comprises the rescheduling (restructuring) of existing debt (approximately Rs660 billion) plus new financing (approximately Rs565 billion) to clear arrears owed to independent power producers (IPPs), fuel suppliers, and other stakeholders. The loan is being extended at a relatively concessional rate: three-month KIBOR minus 0.9 per cent, for a tenure of six years, to be serviced via 24 quarterly installments.
The repayments (interest + principal) will be drawn from a Debt Service Surcharge (DSS) of Rs3.23 per kWh, which is already embedded in current electricity bills. So, in effect, the surcharge that consumers are already paying will now be legally tied to servicing this debt.
The government claims that no new charge or tariff increase is being introduced for consumers beyond what is already in place -- the DSS is not being raised, only being used more formally to pay down this debt.
Once the loan is fully repaid (estimated by 2029–2031), the plan is to eliminate the DSS of Rs3.23/kWh, which would then theoretically reduce tariffs by up to around 10 per cent.
Also, the deal frees up Rs660 billion in sovereign guarantees that were earlier pledged (backstopping power sector liabilities), enabling the government to divert those guarantees / fiscal space to other priority sectors (agriculture, SMEs, health, etc.).
So, the idea is to 'convert' the chaotic cascade of unpaid claims (circular debt) into a structured debt instrument. The success or failure of the plan depends largely on whether the repayment stream is reliable and whether 'new circular debt' is prevented.
The DSS of Rs3.23 per kWh is already being collected in consumer electricity bills. That same surcharge will now be legally earmarked to service (pay interest + principal) the new loan. Because the DSS is already in place, this is not a new charge, but its role becomes more binding.
The plan caps repayments annually (approximately Rs323 billion per year), which gives predictability. In the event of interest rate fluctuations, there is a “ceiling” or buffer up to around Rs1.938 trillion in total liability (interest over time) under stress scenarios.
The approved measure is necessary but not sufficient to stop further accumulation of circular debt. There are several challenges and risks. Circular debt doesn't just come from past unpaid bills; it accrues because of ongoing inefficiencies: theft, line losses, under-billing, under-recovery, capacity payments (payments to IPPs, whether or not electricity is generated), fuel cost overruns, tariff shortfalls and political pressures to subsidise tariffs. Unless these structural issues are addressed, new circular debt will continue to accrue even as old stock is serviced.
Once the debt is fully paid off (by 2029–31, under optimistic assumptions) and the DSS is removed, there is potential for a 10 per cent reduction in tariffs (the tariff base minus the removed surcharge) as projected by officials.
The writer is a freelance contributor.
