Circular debt rise

EDITORIAL: Circular debt as per the June 2026 report, reflective of sectoral inefficiencies, rose by 61 billion rupees – a rise in the stock as per reports that raised the stock of debt to 1.675 trillion rupees by-end-June against the target of 1.614 trillion-rupees agreed with the International Monetary Fund (IMF) under the ongoing Extended Fund Facility programme.

Officials informed Business Recorder that the situation in June 2026 was worse for two reasons: non-payment by K-Electric of 200 billion rupees against power purchases as well as weak performance of some of the distribution companies, accounting for another 100 billion rupees, and raised the legitimate question as to how the circular debt flow could be contained to zero when due amounts remain unpaid.

The Power Division in a briefing to the Economic Coordination Committee (ECC) in June 2026 acknowledged that the earlier target agreed with the IMF was regarded as realistic at the time due to lower international hydrocarbon prices, improved recoveries, reduced technical losses and declining interest rates, which led to projected subsidy savings that would have brought the circular debt down by 779 billion rupees to 1.614 trillion rupees by end of last fiscal year.

However, the circular debt rose to 1,924 trillion rupees on 31 May 2026, including the 873 billion-rupees payable to banks under an approved circular debt financing (1.23 trillion rupees was secured commercially at the recommendation of a task force to retire the debt and pass the interest payable onto consumers) – a proposal that the IMF agreed to this time around as the interest to be charged on the loan declined, given the reduction in the discount rate from 22 percent to 11.5 percent.

K-Electric tariffs are sub judice; however, the Division pledged that it would proactively pursue the case but recommended utilisation of a technical supplementary grant of about 152 billion rupees under Demand No. 45 (allocated to the [Finance Division]) to Demand No. 33 (allocated to the [Power Division]) to finance specific energy and power sector projects, such as solarization initiatives or subsidy adjustment for immediate release in line with the agreed Circular Debt Management Plan to forestall the possibility of a delay/suspension of the next IMF tranche release.

On June 16, 2026, the Economic Coordination Committee (ECC) reviewed a Power Division proposal to release Rs152 billion as a Technical Supplementary Grant (TSG) for Power Distribution Companies (DISCOs). The committee approved a partial release of Rs54.451 billion, adjusting the remaining Rs97.549 billion.

The shortfall from the agreed target and the Power Division recommendations to deal with the shortfall have been proposed and implemented in the past, and there is little comfort level amongst analysts that this time around the outcome (circular debt flow to be followed by stock retirement) would be permanent.

The government needs to look at the issues facing power sector holistically, and recommendations must include the abandonment of the tariff differential subsidy to all distribution companies by allowing each Disco to set its price based on its cost structure (an item that costs the taxpayers nearly 750 billion rupees every year); and, at the same time, take account of all the flawed deals with the Independent Power Producers (IPPs); notably, pay-or-take in dollars that cannot be renegotiated to set the tariff.

Copyright Business Recorder, 2026