ISLAMABAD:
The government has added another Rs364 billion to the flow of power sector circular debt due to inefficiencies, lower recoveries by distribution companies and payment disputes with K-Electric and despite giving Rs302 billion in subsidies, it could not stop the recurrence of the debt.
According to the circular debt report for June 2026, the debt increased by Rs364 billion during fiscal year 2025-26. It was higher by Rs319 billion, or 709%, compared to the preceding year. The Power Division has not yet officially released the one-page report on its website.
The International Monetary Fund (IMF) had allowed the government to add Rs400 billion to the flow of circular debt but also asked it to bring it to zero by giving subsidies from the budget. The constant increase in the circular debt due to reasons that can be fully addressed with better governance and sector-specific policies reflects poorly on both the IMF and the government.
The government gave Rs302 billion in subsidies to retire the stock of circular debt, which was short of the money needed to keep the debt at Rs1.614 trillion by June 2025. As a result, there was a net increase of Rs61 billion in the debt by the last fiscal year. In a statement issued last month, the Power Division said that the federal government had allocated Rs893 billion for the power sector in the FY2025-26 budget. However, a cut of Rs98 billion in the allocated amount adversely affected the pace of debt reduction.
A Power Division spokesperson said had the full budgeted allocation been released to the division, the circular debt would have further declined to Rs1.577 trillion. Instead, due to the shortfall of Rs98 billion, the debt increased by Rs61 billion during the current fiscal year, he added.
Compared to the total subsidies of Rs800 billion for the power sector, the government did not give any subsidy for the gas sector and yet it was expected that there would not be any increase in the gas sector circular debt in the last fiscal year. However, the government did not pass on the reduction in gas prices to consumers in July to make sure that the sector’s debt does not increase further.
The Rs300-billion subsidies were nearly half of the Rs630 billion taxes that Pakistan’s marginalised salaried class paid in the last fiscal year. The government could have provided 50% relief in tax burden to the salaried class by plugging in the inefficiencies of the power sector.
According to details, the government sustained Rs262 billion losses in the last fiscal year due to the “inefficiency” of power distribution companies. The amount was only Rs3 billion less than the preceding year. The power distribution companies also added Rs64 billion to the circular debt in the last fiscal year on account of lower recovery of electricity bills, which was 51% less than the preceding year.
The government has begun the process for privatisation of three profitable power distribution companies – Faisalabad, Gujranwala and Islamabad. Their privatisation, which is expected to take longer than planned, would not help reduce the losses that are largely booked by other entities.
Earlier, there had been a proposal to bundle one profitable distribution firm with a loss-making entity for privatisation, but the government has shelved this plan to sell only good companies.
Around Rs14 billion has also been added to the circular debt on account of interest charges. The government is already penalising the honest consumers by recovering these charges through their electricity bills.
Another Rs194 billion was added due to non-payments by K-Electric. The country’s only privatised power distribution company is not making payments for electricity due to a dispute over delay in finalising the multi-year tariff by the National Electric Power Regulatory Authority.
An amount of Rs75 billion was added to the circular debt due to the delay in tariff adjustments. The government paid Rs129 billion in principal loans of the power sector, whose non-settlement could have pushed the flow of circular debt above Rs600 billion. The Power Division also took the benefit of Rs98 billion worth of reduction in the flow due to payment of subsidies.
During the last review talks, the government had assured the IMF that it would ensure timely tariff increases that could recover costs and prevent a recurrence of circular debt.
For over a decade, both the IMF and the government have been heavily penalising consumers to stop the hike in circular debt. The IMF programme documents showed that the government has been implementing regular tariff adjustments, phasing out untargeted subsidies, converting the accumulated stock in the power sector into CPPA-G liabilities and introducing an extra charge for electricity consumers to retire the principal amount. These measures have reduced the pace of increase in circular debt, but they have contributed to pushing consumers off the national grid and installing solar panels on rooftops.
