- Sustainable solutions demand privatisation, efficiency overhaul, subsidy rationalisation and governance reforms across power sector
- IMF mandate requires structural reforms, tariff adjustments and revenue alignment to eliminate circular debt
In a high-stakes dialogue that could redefine Pakistan’s fiscal trajectory, the government of Pakistan is locked in intensive economic negotiations with the International Monetary Fund (IMF). As of October 1, 2025, these talks, which are part of the ongoing review of an $8.4 billion bailout package, have yielded pivotal decisions aimed at stabilizing the nation’s beleaguered economy. Central to the discussions is a firm IMF mandate to eradicate the chronic circular debt in the power sector by 2031, coupled with a stringent requirement for zero annual growth in debt flows henceforth. This comes amid revelations of staggering flood damages totaling PKR 370 billion, a revised GDP growth target, and a daunting USD 26 billion external financing need for the fiscal year. These developments underscore Pakistan’s delicate balancing act: rebuilding from natural disasters while adhering to lender-prescribed reforms to avert default.
Sources close to the negotiations indicate that while progress has been made on power sector restructuring, including a landmark Rs1.2 trillion banking deal that has already slashed circular debt to around Rs400 billion, challenges persist in tax collection and revenue generation. Economists warn that the IMF may further temper growth forecasts, potentially lowering them to 3.2% from initial projections, reflecting the floods‘ lingering drag on recovery. As provincial delegations, including Punjab’s scheduled briefing on October 2, continue to apprise the IMF of disaster impacts, the stakes could not be higher for a country already grappling with inflation, unemployment, and external debt pressures.
Government officials briefed the IMF delegation that substantial headway has been achieved through the Rs1.2 trillion syndicated financing agreement with local banks, secured in late September 2025. This deal, the largest of its kind in Pakistan’s history, restructures legacy obligations and injects fresh liquidity, effectively halving the debt burden to approximately Rs400 billion. From fiscal year 2026 onward, the focus shifts to structural fixes, including enhanced bill collections, reduced transmission losses, and tariff adjustments to align revenues with costs. The Power Division highlighted these strides during the second economic review, emphasizing that the initiative not only clears immediate arrears but also introduces a Rs3 per unit surcharge to service repayments without further fiscal strain. Yet, the path forward is fraught. Circular debt, which ballooned to Rs2.4 trillion by mid-2024, remains a drag on investment and growth, crowding out funds for infrastructure and social programs.
Analysts note that while the banking consortium’s involvement signals market confidence, sustained zero inflows will demand politically tough choices, such as curbing subsidies for influential sectors and accelerating privatization of loss-making distribution companies. The IMF’s insistence aligns with its broader Extended Fund Facility (EFF) conditions, where non-compliance could jeopardize the next tranche of funding. As one economist remarked in recent commentary, “This isn’t just about numbers; it’s about rewiring an entire sector to prevent the debt from circling back eternally.”
In the labyrinthine corridors of Pakistan’s energy sector, a financial specter has loomed large for over two decades: circular debt. This vicious cycle of unpaid obligations among power generators, transmission companies, distribution entities, and consumers has not only drained the national exchequer but also stifled economic growth, exacerbated inflation, and perpetuated energy shortages.
As of September 2025, Pakistan stands at a pivotal juncture. The government, under Prime Minister Shehbaz Sharif, has inked a landmark Rs1.225 trillion ($4.29 billion) financing agreement with a consortium of 18 banks—the largest syndicated deal in the country’s history—to tackle this behemoth. This move, hailed by Finance Minister Muhammad Aurangzeb as a “game-changer,” aims to slash the debt stock by over half, reducing it to approximately Rs400 billion, while introducing structural reforms to stem future inflows. Yet, amid the optimism, the International Monetary Fund (IMF) has issued a stern directive: zero inflows into circular debt this fiscal year, with complete elimination targeted by 2031.
The circular debt, which ballooned to Rs2.393 trillion by the end of fiscal year 2024 (FY24), has been pruned to Rs1.614 trillion at the close of FY25, a commendable Rs780 billion reduction, largely through tariff hikes, subsidy rationalization, and one-off fiscal injections. Pakistan’s energy woes are not merely fiscal; they are existential. With a population exceeding 240 million and an economy teetering on recovery from multiple crises—floods, political instability, and global commodity shocks—the power sector’s dysfunction ripples through every facet of life. Factories idle due to load-shedding, households grapple with soaring bills, and foreign investors balk at the opacity. The Rs1.225 trillion deal, comprising Rs660 billion in loan restructuring and Rs565 billion in fresh financing serviced via a Rs3 per unit surcharge, promises relief but raises questions: Will it trickle down to ordinary Pakistanis, or merely postpone the inevitable? As the stock market surged to record highs in late September 2025, buoyed by this news and diplomatic wins, the real test lies in implementation. This exploration is timely, offering a roadmap for policymakers, investors, and citizens alike.
At its core, circular debt in Pakistan’s power sector is a mismatch between costs and revenues, manifesting as a chain of arrears that circles back without resolution. It begins with consumers—households, industries, and agriculture—who delay or default on bills due to high tariffs, affordability issues, or outright theft. Distribution companies (DISCOs), burdened by these shortfalls, fail to pay transmission entities like the National Transmission and Despatch Company (NTDC). In turn, NTDC cannot settle dues with independent power producers (IPPs), who rely on imported fuels amid volatile global prices. The government steps in with subsidies or bailouts, but these are often tardy, perpetuating the loop. This phenomenon is not unique to Pakistan but has festered here due to structural flaws.
As of 2025, the debt encompasses payables across the value chain: from fuel suppliers to generators (Rs800 billion-plus), generators to NTDC (Rs500 billion), and NTDC to DISCOs (Rs300 billion), with inter-DISCO imbalances adding layers. Unlike linear debt, which accrues interest and principal, circular debt is “self-reinforcing,” as unpaid amounts generate penalties, further inflating the stock. The IMF defines it as “accumulated payables and receivables in the energy sector that impair liquidity and crowd out investment.” Quantitatively, it erodes fiscal space. In FY25, the power sector consumed 1.5% of GDP in subsidies alone, equivalent to Rs1.2 trillion, diverting funds from health and education. Qualitatively, it fosters a culture of non-payment: Why pay if the system is rigged against efficiency? Experts at the Pakistan Institute of Development Economics (PIDE) liken it to a “Ponzi scheme,” where new inflows (subsidies) service old debts, unsustainable without growth.
The gas sector mirrors this, with Rs1.2 trillion in circular debt as of mid-2025, intertwined via cross-subsidies for fertilizer and power plants. Together, they form a Rs2.8 trillion albatross, 2.5% of GDP, underscoring the need for integrated reforms. Circular debt’s origins trace to the 1990s energy shortfall, when Pakistan, urbanizing rapidly, faced blackouts crippling industry. The 1994 Power Policy lured IPPs with sovereign guarantees and dollar-indexed tariffs, promising investment but ignoring demand-side management.
By 2000, overcapacity loomed as economic growth stalled post-9/11, leaving idle plants and mounting fixed costs. The crisis escalated in the mid-2000s. Musharraf’s era saw fuel imports surge amid circular debt’s embryonic form: Rs100 billion by 2006. The 2008 global financial crisis and domestic political turmoil amplified it; Zardari’s government injected Rs500 billion in bailouts by 2013, yet debt hit Rs500 billion. Nawaz Sharif’s 2013-2018 tenure prioritized China-Pakistan Economic Corridor (CPEC) projects, adding 10,000 MW capacity but Rs1 trillion in IPP dues by 2018, fueled by coal and LNG imports vulnerable to oil shocks.
Imran Khan’s 2018-2022 government grappled with a Rs1.3 trillion stock amid COVID-19, imposing moratoriums on IPP payments and tariff hikes that sparked protests. By 2022, debt exceeded Rs2 trillion, coinciding with floods that damaged infrastructure, costing Rs3.5 trillion in losses. Shehbaz Sharif’s return in 2022 inherited this, negotiating a $3 billion IMF standby in 2023, which mandated quarterly tariff adjustments but ballooned consumer bills by 50%. Into 2025, the trajectory bent downward. FY24 closed at Rs2.393 trillion, but aggressive measures—Rs400 billion in one-off payments and 18% tariff hikes—shaved it to Rs1.614 trillion by June 2025. The July 2025 financing deal, facilitated by the Special Investment Facilitation Council (SIFC), marks a watershed, restructuring legacy loans at lower rates (KIBOR minus 90 basis points) and ring-fencing repayments via surcharges.
Yet, history warns: Past deals (e.g., 2019’s Rs400 billion infusion) failed without governance fixes. Oil prices stabilizing at $70/barrel post-Ukraine war aided, but rupee volatility (from 278 to 285/USD in September 2025) threatens gains. This evolution reveals a pattern i.e Short-term palliatives amid long-term neglect of theft (20% losses in DISCOs) and over-reliance on fossils (60% of mix). As Pakistan eyes net-zero by 2050, 2025’s reforms could pivot toward sustainability or repeat cycles.
September 2025 paints a cautiously optimistic picture for Pakistan’s circular debt. The FY25 end-stock stands at Rs1.614 trillion, a 33% drop from FY24’s Rs2.393 trillion, per Ministry of Finance data. This fiscal space was carved via Rs780 billion in interventions: tariff rebasing in February and July, adding Rs2.5/unit, and subsidy cuts for protected consumers.
By July 31, 2025, the stock hovered at Rs1.661 trillion, per Central Power Purchasing Agency (CPPA-G), before the mega-deal accelerated clearance. The Rs1.225 trillion agreement, signed on September 25, 2025, is transformative. It clears Rs1.225 trillion in payables to IPPs and gas suppliers, with Rs659.6 billion restructured (from KIBOR-plus to minus rates, sans guarantees) and Rs565.4 billion fresh funds. Repayments are secured by a dedicated Power Sector Circular Debt Servicing Surcharge (Rs3/unit), projected to generate Rs200 billion annually without straining the budget. Oil and Gas Development Company Limited (OGDCL) received its third Rs7.67 billion interest installment on October 1, part of a 12-month Rs92 billion schedule starting July.
IMF’s first review under the $7 billion Extended Fund Facility (EFF), completed in May 2025, commended these steps, noting “timely tariff adjustments reduced flow by 40%.” Yet, the September 27 IMF-Pakistan talks demanded zero net inflows for FY26, with debt capped at Rs1.3 trillion end-June 2026. The Chairman Zafar Masud emphasizing “plugging leakages” over bailouts. Regionally, DISCOs like Peshawar Electric Supply Company (PESCO) report 25% recovery rates, down from 40% pre-hikes, while K-Electric’s isolated debt lingers at Rs200 billion. Capacity payments, 30% of tariffs, remain contentious, with IPPs owed Rs400 billion. The deal’s early wins: PSX KSE-100 hit 72,000 points on September 29, up 5% on debt news. However, as the sector’s “intractability” persists, with FY26 projections hinging on 7% GDP growth and stable remittances ($32 billion).
In short, September 2025’s status is transitional: Debt down, liquidity up, but sustainability unproven. The circular debt’s tenacity stems from multifaceted causes, blending structural, operational, and policy failures. First, DISCO inefficiencies top the list. Aggregate technical and commercial (AT&C) losses average 18%, with theft in rural feeders exceeding 30% in Sindh and Balochistan. PIDE research attributes 40% of debt buildup to under-recovery: DISCOs collect Rs1.2 trillion annually but incur Rs1.5 trillion costs, passing shortfalls upstream.
Privatization attempts, like in 2024 for three DISCOs, stalled over valuation disputes. Second, tariff distortions. Protected consumers (200-300 units/month) enjoy 50% subsidies, costing Rs600 billion yearly, while industry pays 20% above cost. Fuel price volatility—LNG up 15% in 2025 — amplifies this, as 70% tariffs are fuel-adjusted. Third, governance lapses. IPP contracts from the 1990s-2010s guarantee returns regardless of output, yielding Rs300 billion in idle payments. Corruption in procurement and metering evasion add Rs200 billion losses. CPEC’s coal plants, while adding capacity, locked in high-cost debt servicing. Finally, external shocks: Climate change-induced floods in 2022-2024 damaged 5,000 MW infrastructure, while rupee depreciation inflated import bills by 20%. Insufficient renewables—only 5% solar/hydro—exposes the sector to fossils.
These causes interlock, demanding holistic fixes. Circular debt’s ramifications are profound, throttling Pakistan’s $350 billion economy. Economically, it crowds out investment. Power shortages cost 2-3% GDP annually in lost output, with manufacturing growth at 1.5% in FY25 versus 5% potential. Inflation, at 12% in September 2025, partly stems from energy pass-throughs, eroding purchasing power. The external account suffers: Fuel imports gobbled 40% of $25 billion forex in FY25, pressuring reserves ($9 billion). Banks, holding Rs1 trillion in sovereign-guaranteed loans, face liquidity risks, as noted in IIF reports. Socially, inequities deepen. Rural poor endure 8-10 hour load-shedding, stunting education—30% schools lack electricity. Urban industries, like textiles (60% exports), cut jobs amid Rs15/unit hikes, unemployment at 8%. Hospitals in Khyber Pakhtunkhwa report outages delaying surgeries, per @AllanSavory5’s thread on systemic failures.
Environmentally, fossil dependence emits 200 million tons CO2 yearly, clashing with Paris commitments. Overall, it perpetuates poverty, with 40% households energy-poor. The Sharif government’s 2025 playbook is multifaceted, blending fiscal firepower with reforms. Central is the Rs1.225 trillion deal, executed via SIFC, which clears IPP arrears and injects liquidity. It includes smart metering for 2 million consumers by December 2025, targeting 5% loss reduction. Tariff reforms under NEPRA’s FY26 slab (base rate Rs38/unit) ensure cost recovery, with quarterly adjustments to cap flows at zero.
Bids for two DISCOs expected Q1 2026, modeled on K-Electric’s success. The Green Pakistan Initiative ramps renewables to 20% by 2030, with 1,000 MW solar auctions in September 2025. Subsidy targeting via Benazir Income Support Program (BISP) shields 8 million vulnerable households. Digital interventions include CPPA-G’s block chain for payments, piloted in Punjab, reducing delays by 30%.
Anti-theft drives in Lahore recovered Rs10 billion in Q3 2025. Leghari’s “six-year elimination” vow ties to these, with Rs4.6 billion Islamic Sukuk planned for October to fund gas sector clearance. The IMF’s $7 billion EFF, approved September 2024, is the linchpin. Its May 2025 review praised debt reduction but mandated zero inflows, privatization, and cost audits. The March 2025 staff-level agreement unlocked $1 billion, conditional on FY26 budget surplus. Deadline: Full elimination by 2031, with annual targets. World Bank and Asian Development Bank (ADB) chip in: $500 million for DISCO efficiency in 2025, plus $300 million green bonds. Saudi Arabia’s $1 billion deposit rollover in September aids reserves. UAE’s $2 billion investment in renewables complements. These partners enforce discipline but risk sovereignty erosion if reforms falter.
Tariff hikes fuel protests, as in 2023’s Punjab marches. Implementation lags—smart meters deployed at 20% target. Global uncertainties, like oil at $75, could reverse gains.
Holistic solutions must address causes head-on.
- Efficiency Overhaul: Full privatization of DISCOs by 2027, with performance-based incentives. AI-driven loss detection could cut AT&C to 10%.
- Tariff Rationalization: Dynamic pricing via time-of-use meters, subsidies via DBT to BISP, saving Rs300 billion.
- Renewable Shift: Scale solar/wind to 30% by 2030, via $5 billion ADB funding, reducing import dependence.
- Governance Reforms: Renegotiate IPP take-or-pay clauses, cap returns at 12%. Blockchain for transparent payments.
- Demand Management: Industrial EE programs, like LED retrofits, targeting 10% savings.
Integrated with IMF targets, these could yield zero debt by 2030, boosting GDP 2%.
Last Word
Pakistan’s circular debt in 2025, while diminished, remains a litmus test for reform resolve. The Rs1.225 trillion deal and IMF pact offer hope, but success demands transcending politics for people. By prioritizing efficiency, equity, and sustainability, Pakistan can illuminate its future —debt-free and powered by progress.
The author, Nazir Ahmed Shaikh, is a freelance writer, columnist, blogger, and motivational speaker. He writes articles on diversified topics. He can be reached at sir.nazir.shaikh@gmail.com