Public Finance

The numbers in Pakistan’s circular debt are staggering—but the recent Circular Debt Report – March 2025 issued by the Power Division reveals a surprisingly quiet trend: the cumulative increase in circular debt during the first nine months of FY2024-25 was just PKR 2 billion. For a sector long plagued by runaway debt accumulation, this figure—flatlined compared to previous years—is both unusual and cautiously welcome.

A Look Behind the Numbers

According to the report, the total circular debt stock stands at PKR 2,396 billion as of March 2025, marginally higher than PKR 2,394 billion recorded at the start of the fiscal year. This includes:

This drop from PKR 2,794 billion in March 2024 to PKR 2,396 billion a year later indicates a noteworthy reduction of PKR 398 billion, but it’s essential to decode the movement rather than celebrate it blindly.

A Temporary Fix or Real Reform?

Digging into the breakdown, the primary contributors to circular debt growth remain inefficiencies in DISCOs (Distribution Companies) and financial underperformance:

• DISCO Losses due to inefficiency added PKR 143 billion.
• Under-recoveries by DISCOs added PKR 78 billion.
• Pending generation costs (QTAs and FCA adjustments) accounted for a negative contribution of PKR 110 billion, indicating a positive adjustment or prior settlement.

Interestingly, interest charges on parked debt and IPPs cost PKR 74 billion—still a significant pressure on the system, albeit lower than previous years. Also, non-payment by K-Electric continues to be a structural drain, with PKR 10 billion added during this period and a total outstanding of PKR 223 billion (including markup of PKR 186.5 billion).

The fact that the net increase in circular debt is only PKR 2 billion is largely due to substantial stock payments made using fiscal space, totaling PKR 151 billion in the reporting period. This includes principal repayments by Power Holding Limited (PHL), which brought down the total parked debt and stabilized the overall numbers.

Sustainability in Question

While the numbers appear controlled, this “improvement” is heavily dependent on fiscal interventions rather than structural reform. The continuation of budgeted but unreleased subsidies, ad hoc adjustments, and partial data transparency signal unresolved inefficiencies.

The report provides no clear roadmap on how to address the root causes of circular debt:

• High transmission and distribution losses,
• Revenue shortfalls from DISCOs,
• Delays in tariff adjustments,
• The lack of timely subsidy disbursement.

The pending reconciliation with K-Electric remains a glaring gap, where the receivable amount has swelled significantly without any firm settlement timeline.

Toward a Forward-Looking Framework

To genuinely solve the circular debt crisis, Pakistan’s energy sector needs to pivot from short-term fiscal patchwork to long-term structural overhaul. This includes:

• Privatization or restructuring of DISCOs, focusing on performance-based incentives.
• Automated tariff adjustment mechanisms to reflect generation costs in real-time.
• Strict timelines for subsidy clearance tied to federal budget disbursement schedules.
• A binding framework for inter-agency settlements, particularly involving K-Electric and related federal-provincial disputes.

Without these reforms, any temporary stabilization will remain just that—temporary.

The Power Division’s March 2025 report should be viewed as a plateau, not a peak. It reflects fiscal muscle being used to hold the line, but not necessarily a reduction in underlying systemic stress. For meaningful progress, the government must blend policy clarity with operational accountability.

This article was published on Publicfinance.pk.