What’s Behind Pakistan’s Circular Debt and Why You Should Care
Editor’s Note - August 14th, 2025: When we first published this video, Pakistan’s circular debt stood at about Rs.1.4 trillion. While this number has since increased, there is also optimism that we are moving toward recovery. Nonetheless, the issue remains an important one for Pakistan’s economy and consumer.
The origin of debt seems simple: when you cannot afford to pay back what you owe, you incur a debt. But what if it wasn’t your fault in the first place? What if you couldn’t pay what you owed, because someone else couldn’t pay you?
In Pakistan’s energy sector, the term “circular debt” is a daily reality that directly affects millions. Behind every power outage and inflated bill lies a crisis of unpaid dues and broken financial links. This isn't just a bureaucratic problem or a line item on a government budget. It is the reason electricity prices in Pakistan keep rising, and why the national grid struggles to stay afloat.
Circular debt is a vicious cycle where everyone in our energy sector supply chain owes everyone else money. The source of this burden is the relentless IOUs that keep piling up among the players in the energy sector supply chain. This includes power distributors, power producers, as well as oil and gas companies, such as PEPCO (Pakistan Electric Power Company), IPPs (Independent Power Producers), K-Electric, Pakistan State Oil and Southern Sui Gas.
The term “circular debt” began making headlines as early as 2007 when oil imports became more expensive, because a) we had a sharp devaluation of the Rupee versus the US dollar, and b) oil prices were rising globally anyway.
At the time, Pakistan began to shift from hydroelectric to oil and gas-based power generation. To account for this rising cost of importing oil, power regulators recommended an increase in electricity prices for the consumer. The government did not follow this recommendation, but they did not make up the difference in price either.
And the system's technical inefficiencies have only compounded the problem. About 15% of electricity is lost during transmission, and roughly 10% of consumers simply don’t pay their bills. The result is a massive shortfall in expected revenue.
When the government and consumers fail to pay distribution companies in full, those companies fall behind on payments to power producers—who then can’t pay fuel suppliers.
Here’s a simple example: suppose power producers supply 100 million units of electricity at Rs. 10 per unit. The government decides to charge customers Rs. 9 instead. Due to line losses and non-payment, revenue is collected on only 75 million units. That’s Rs. 675 billion recovered—when Rs. 1 trillion was expected by the power producer. This leaves a Rs. 325 billion deficit.
Who covers this gap? Typically, the government—either by borrowing from banks, which increases Pakistan’s energy sector debt, or by raising electricity prices later, which pushes the burden back onto consumers. This cycle fuels Pakistan’s energy crisis, adds to national debt, and deepens economic instability.
We did not get here overnight. Those in power have had many chances to address the issue since it became a serious threat in the late 2000s. In December 2009, this figure was eight times less than it was in December 2018.
Editor’s Note - August 14th, 2025: While Pakistan’s circular debt has decreased from Rs 2.68 trillion in February 2024 to Rs 1.61 trillion by June 2025, this reduction has yet to fully relieve the energy sector’s financial stress. Discover how Pakistan’s power sector reforms aim to resolve circular debt by watching this video where we interview Zafar Masud, Chairman of the Pakistan Banks’ Association.
This article was developed with the assistance of AI tools.
