Pakistan’s circular debt isn’t a financial crisis

Circular debt is a governance failure; it isn’t a financial crisis.

Every year, the nation is presented with a new financial explanation for the worsening circular debt—insufficient recoveries, delayed payments, subsidy shortfalls, or the latest inability to meet an IMF target. Yet these are merely symptoms, not the disease.

Pakistan’s power sector circular debt is fundamentally a governance crisis that has been allowed to fester across the entire energy value chain. Until transparency, accountability and institutional discipline replace opacity and vested interests, no amount of financial engineering or IMF conditionality will provide a lasting solution.

The latest reports that Pakistan has failed to honour its commitment to the International Monetary Fund (IMF) to contain the power sector’s circular debt at Rs1.614 trillion by June 30, 2026, should surprise no one. Officials have attributed the slippage—estimated at around Rs300 billion—to K-Electric’s outstanding payments and the weak financial performance of several power distribution companies (Discos).

Similar explanations have been offered repeatedly over the past decade.

These arguments conveniently divert attention from the real issue. Circular debt is not created because one company delays payment or because another utility performs poorly. Those are merely the final manifestations of a much deeper structural problem.

Circular debt is born from chronic failures of governance throughout Pakistan’s energy supply chain.

The problem begins well before electricity reaches the consumer. It starts with procurement decisions, fuel imports, pricing mechanisms, storage arrangements, transportation logistics, contractual obligations and operational oversight.

Weak planning, inadequate monitoring and poor enforcement create inefficiencies at every stage. Each inefficiency adds a hidden cost that eventually appears as another increase in circular debt.

The generation segment is no exception. Both public-sector generation companies and Independent Power Producers (IPPs) operate within a framework that has historically lacked sufficient transparency and rigorous performance auditing. While recent renegotiations with several IPPs have reduced some financial burdens, questions remain regarding plant utilisation, operational efficiency, fuel optimisation, maintenance practices and capacity planning. Without continuous independent oversight, inefficiencies become institutionalised rather than corrected.

The transmission network represents another weak link. Technical losses remain significantly above international benchmarks in several areas because of ageing infrastructure, delayed investments and inadequate maintenance. Every unit of electricity lost before reaching consumers ultimately becomes an additional financial burden on the system.

Distribution companies continue to suffer from weak governance, political interference and limited managerial accountability. Electricity theft, inaccurate metering, delayed billing, poor recoveries and operational inefficiencies continue despite years of reform programmes.

Honest consumers are effectively penalised by paying higher tariffs to compensate for the losses created by theft and inefficiency elsewhere in the system.

Nor does the challenge end with electricity. Pakistan’s oil and gas sectors are closely intertwined with power generation. Delayed payments, leakages, weak contract management, unaccounted-for losses and governance shortcomings within fuel supply companies create additional distortions that ripple across the entire energy ecosystem.

Consumer behaviour also forms part of the equation. Power theft, gas theft, meter tampering and non-payment have become widespread in many regions.

Weak enforcement, political patronage and lengthy legal processes have undermined deterrence. As long as theft remains a low-risk, high-reward activity, the financial burden will continue to be transferred to compliant consumers and the national exchequer.

Successive governments have largely relied on financial fixes rather than structural reforms. They inject subsidies, borrow additional funds, restructure liabilities, increase tariffs or negotiate temporary arrangements with creditors. These measures may slow the accumulation of circular debt for a few months, but they do not eliminate the governance failures that continuously regenerate it.

The IMF understandably focuses on measurable fiscal outcomes, including limits on circular debt accumulation. However, financial targets alone cannot cure institutional weaknesses. Even if the government somehow succeeds in temporarily reducing the stock of circular debt through borrowing or accounting adjustments, the debt will inevitably return unless governance across the entire value chain is fundamentally reformed. Pakistan therefore requires a shift in both diagnosis and treatment.

The starting point should be complete transparency throughout the energy supply chain. Every stage—from fuel procurement to final billing—should be digitally monitored, independently audited and publicly reported. Operational performance indicators for generation companies, transmission operators, distribution companies and fuel suppliers should be published regularly, allowing both Parliament and the public to hold institutions accountable.

Equally important is professional management insulated from political interference. Board appointments should be based on competence rather than patronage, while chief executives must be evaluated against measurable operational targets.

Regulatory institutions must be empowered to enforce compliance without fear or favour.

Modern technologies can significantly reduce losses. Smart metering, digital billing, advanced grid management systems, predictive maintenance and data analytics have transformed utility performance in many countries.

Pakistan possesses the technical capability to adopt these solutions but requires the political will to implement them consistently.

The circular debt debate must therefore move beyond accounting numbers and payment disputes. The recurring annual explanations have become increasingly unconvincing because they ignore the underlying disease. K-Electric’s dues or the poor performance of a few Discos may explain part of this year’s increase, but they do not explain why the same crisis has persisted under successive governments for nearly two decades.

Circular debt is ultimately a mirror reflecting the quality of governance in Pakistan’s energy sector. Unless every leak across the supply chain is identified, exposed and permanently sealed, the debt will continue to circulate—regardless of tariff increases, IMF programmes or periodic financial restructuring.

Pakistan does not suffer from a shortage of financial solutions. It suffers from a shortage of transparent governance, institutional accountability and the political courage to confront entrenched vested interests.

Copyright Business Recorder, 2026