Circular debt is an expanding fiscal trap that quietly devours our national budget
Kamran Khan
One of Pakistan’s most significant but lesser-discussed problems confronting its economy today is circular debt—an expanding fiscal trap that quietly devours our national budget, incapacitates our energy sector, and stifles economic growth. To the ordinary citizen, circular debt may be a buzzword whose significance will be grasped by econo-geeks alone, but in reality, it affects all of us—every time we endure a power shutdown, pay excessively priced electricity dues, or read about yet another government bailout bid.
Simply put, Pakistan’s circular debt is the outstanding amount throughout the energy supply chain—electricity producers first, followed by the DISCOs, and then the consumers and the government. It begins when power distribution companies (DISCOs) cannot recover the entire value of electricity sold to consumers. The causes include inefficient billing systems, electricity theft, government subsidies not being paid on time, and people simply not paying their bills. If DISCOs do not receive their payments in full, then power producers (IPPs) cannot be paid by them, and they (IPPs) cannot pay fuel suppliers. This creates a chain of unpaid amounts that accumulate over time, therefore, “circular” debt.
As of early 2025, Pakistan’s circular debt in the power sector has crossed Rs.2.6 trillion, according to official sources. That’s not just a number—it’s money that could have gone into improving hospitals, schools, or infrastructure. Instead, it’s stuck in a broken system that continues to expand the debt every year. To put it simply, we’re borrowing money to pay for electricity that people either don’t pay for or receive through an inefficient system.
Its economic consequences are tangible. One, the government has to infuse cash in the energy sector constantly so it doesn’t fold up—money normally raised through loans, which mounts up to additional national debt. Two, international lenders and investors like the IMF, World Bank, and private companies are increasingly cautious about transacting business with Pakistan because they know their dividends might not be forthcoming. Third, the government invests huge amounts of money in subsidies, often badly targeted, that only accrue to no one but the poor and the economy. This inefficient expenditure of resources lessens investment in areas that can deliver actual growth and jobs.
Worse, this circular debt problem discourages new investment in the renewable energy industry. Why would a firm invest in solar or wind power if it knows the government will not pay them on time? Pakistan has enormous potential in the renewable energy business, especially solar and wind, but circular debt still scares investors away, forcing us to consume imported fuels, which are expensive and fluctuating in price.
Read: Pakistan signs Rs1275bn deal to eliminate circular debt
So why has the problem not been addressed? It’s not because the government is unaware of the problem. Various reforms have been mooted and even partially attempted, like tariff reforms, better billing systems, and privatization of distribution utilities. Political pressure, poor governance, and lack of enforcement, however, kept long-term solutions at bay. Political parties in the election season are afraid to raise the cost of electricity or act against defaulters for fear of losing voters. Also, powerful interests having stakes at play gain from the failed system and shun reforms.
The human cost of this crisis is also significant. Frequent load shedding, especially in rural and low-income areas, limits access to water, healthcare, and education. Industries suffer from power outages or high energy costs, making them less competitive globally. This slows down production, increases unemployment, and pushes people further into poverty. A weak energy sector means a weak economy, and that’s the reality we’re facing.
So, what can be done? First, the government must make tough but inescapable decisions. It must enforce payment of bills strictly, plug electricity pilferage, and reduce subsidies, but not only to the very poor. Second, investment in energy infrastructure—smart grids, prepaid meters, and alternative energy sources—must be increased. Third, bring in transparency. All energy contracts, payments, and receivables must be audited and put out in the public domain. Fourth, political consensus on energy reforms, above party lines, is required. Unless all political parties reach a consensus on a long-term strategy, circular debt will keep arising with each new government.
Read: Stalled Progress, Stalled Economy
___________________
Kamran Khan is a student at the School of Economics, Quaid e Azam University Islamabad
