Circular debt: claims collapse, liabilities return

The government’s claims of containing power-sector circular debt have not survived the test of its own year-end figures. During the fiscal year (FY) 2025–26, another Rs. 364 billion was added to the flow of circular debt. This happened despite the provision of Rs. 302 billion in subsidies and repeated assurances that operational improvements, tariff adjustments, negotiations with independent power producers and financial restructuring had brought the problem under control.

According to the latest report, the gross addition of Rs. 364 billion was Rs. 319 billion, or 709 percent, higher than in the preceding year. After using Rs. 302 billion of public money to reduce the accumulated liability, the reported stock still increased by about Rs. 61 billion from its June 2025 level of Rs.1.614 trillion.

These numbers expose the difference between managing the recorded stock and stopping the recurring flow. A subsidy can reduce the amount appearing in the circular-debt account on a particular date. It cannot remove the inefficiencies, payment defaults, regulatory delays and governance failures that create new liabilities every month.

The Power Division had taken a very different position earlier. Responding to reports that circular debt had risen during July–November 2025, it described the increase as seasonal and maintained that such variations normally reversed during the second half of the financial year. Its official rebuttal predicted that the circular-debt position would be fully contained by June 2026, with no net addition to the overall stock.

The financial year has ended with a gross flow of Rs. 364 billion and a net increase even after a large fiscal injection. The promised reversal did not take place. The language of containment concealed continued deterioration in the financial operations of the power sector.

The reported composition of the increase is equally disturbing. Inefficiencies of power distribution companies caused losses of Rs. 262 billion, only Rs. 3 billion less than in the preceding year. Lower recovery of electricity bills added Rs. 64 billion. Interest charges contributed another Rs. 14 billion, while delays in tariff adjustments added Rs. 75 billion.

A further Rs. 194 billion arose from non-payment by K-Electric, reportedly connected with the delay in determining its multi-year tariff. This cannot be classified as an unavoidable commercial loss. It represents a failure of regulation, contract administration and timely governmental decision-making. When tariff determinations, subsidy decisions or payment settlements are delayed, the resulting liability does not disappear. It moves through the electricity chain until it is recorded as circular debt and passed to taxpayers or consumers.

The reported components and adjustments must be examined carefully when the complete official statement is released. The latest report available on ministry’s website is of April 2026.

The Power Division has not placed even its one-page circular-debt reports from May to July 2026 on its website. Public discussion is consequently being conducted based on figures reported in the press. The government cannot demand acceptance of its success narrative while withholding the underlying data required testing it.

The Rs. 302 billion subsidy used to contain the closing stock was nearly half of the approximately Rs. 630 billion collected in income tax from salaried persons during the same year. This comparison shows the real social cost of power-sector failure.

Citizens who have no role in managing distribution companies, finalising tariffs or settling inter-company disputes are required to finance the consequences through taxation. They also pay through electricity tariffs, surcharges, fuel-price adjustments and declining service quality. Honest consumers are charged for theft, poor recoveries, technical losses and delayed official decisions. As tariffs rise, more households and businesses with adequate resources shift to rooftop solar systems.

The grid is left with a shrinking base of paying consumers and a large stock of fixed capacity costs. Tariffs must then be raised further to recover those costs from fewer units sold. The policy response itself deepens the financial problem.

For more than a decade, governments and the International Monetary Fund (IMF) have relied heavily on tariff increases, periodic adjustments, withdrawal of subsidies and additional surcharges. These measures may narrow the accounting gap temporarily, but they do not establish commercial discipline within distribution companies or personal accountability for persistent losses.

The IMF reportedly allowed up to Rs. 400 billion to be added to the circular-debt flow during FY 2025–26, while requiring the government to neutralise the addition through budgetary subsidies.

This approach turns circular debt into an exercise in fiscal presentation. A liability generated inside the electricity system is paid from the federal budget and then described as contained. The loss has not been eliminated. Its location has changed.

The same problem arises with the Rs. 1.225 trillion circular-debt settlement plan. Refinancing expensive liabilities at more favourable rates can reduce financing costs and provide immediate liquidity.

It does not constitute retirement of debt in any economic sense when the replacement financing has to be repaid over six years through charges imposed on electricity consumers.

Pakistan will be servicing yesterday’s circular debt while the unreformed system continues creating fresh liabilities. Financial engineering is being presented as reform because it postpones recognition of the full fiscal burden. Liquidity becomes a substitute for correcting the institutions responsible for the crisis.

The proposed privatisation of the distribution companies also requires closer scrutiny. The government has started with Faisalabad, Gujranwala and Islamabad electricity supply companies, which are among the relatively better-performing entities. Selling profitable or manageable companies while retaining those responsible for the largest losses will not remove the structural deficit. It may deprive the public sector of its stronger revenue-generating assets while leaving taxpayers responsible for the weakest companies.

Privatisation can improve performance where there is transparent valuation, effective regulation and genuine transfer of commercial risk. It cannot succeed if private investors acquire the sound operations while the state remains responsible for accumulated liabilities, political interference, theft-prone areas and unrecoverable receivables. That would amount to privatisation of gains and socialisation of losses.

A credible reform programme must begin with full disclosure. Monthly circular-debt reports should identify, company by company, transmission and distribution losses, recovery ratios, unpaid subsidies, tariff differentials, government receivables, interest costs and payment disputes. Parliament and the public should be able to determine who created each component of the liability and what action followed.

The government must also explain why DISCO inefficiencies remained at Rs. 262 billion after years of tariff increases and reform commitments. Officials and boards responsible for continuing losses cannot remain immune from consequences while consumers are subjected to automatic adjustments. Commercial discipline cannot be imposed only upon those receiving electricity; it must apply with greater force to those managing the system.

Circular debt is not an accident produced by one adverse year. It is the accumulated result of deferred political decisions, fragmented responsibility, weak regulation and the routine transfer of institutional losses to the public. Subsidies, refinancing arrangements and debt-service surcharges may alter its form, but they do not change its origin.

The real measure of reform is not how much old debt has been refinanced, subsidised or shifted from one public account to another. It is whether the power sector can complete a financial year without creating fresh unpaid liabilities. By that standard, FY 2025–26 was not a success. It was yet another year in which public money concealed, but could not cure, the recurrence of circular debt.

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Dr. Ikramul Haq, Advocate Supreme Court, specializes in constitutional, corporate, media, environment, ML/CFT related laws, IT, intellectual property, arbitration and international tax laws. He holds an LLD in tax laws with specialization in transfer pricing. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He served Civil Services of Pakistan from 1984 to 1996.