ISLAMABAD: Pakistan’s energy sector remains a major drag on the economy, with accumulated liabilities exceeding Rs4.6 trillion and little progress on long-promised reforms. Weak recoveries, rampant theft, poor infrastructure, governance lapses, and market inefficiencies have entrenched the so-called “circular debt,” according to a new report by the Washington-based Institute of International Finance (IIF).
The IIF estimates that energy-related debt now equals 4% of GDP, weighing heavily on fiscal stability, growth, inflation, and the external balance. Despite periodic government interventions — including a recent Rs800 billion payout — the underlying debt flow remains unchecked. As of June 2025, circular debt alone stood at Rs1.6tr (1.4% of GDP), while power producers owed an additional Rs3tr to the oil and gas sector.
To contain rising costs, the government set up Power Holding Limited (PHL) to inject liquidity into the energy market. However, by absorbing PHL liabilities, public debt has swelled, further increasing fiscal risks. Circular debt now represents 2.2% of total government debt, excluding arrears owed by state-run power firms to fuel suppliers. Alongside energy subsidies, these liabilities continue to squeeze development spending and social programmes.
Economic fallout
The consequences extend beyond fiscal management. Heavy reliance on domestic banks for PHL borrowing has crowded out private sector credit, while recurring outages disrupt industrial activity, investment, and competitiveness. At the same time, soaring electricity tariffs fuel inflation, and dependence on imported fuel worsens external imbalances during rupee volatility.
Policy moves, limited impact
Authorities have taken steps to reform the sector, including the launch of the Competitive Trading Bilateral Contract Market (CTBCM) to open electricity trading, shifting IPP contracts from “take-or-pay” to “take-and-pay,” targeted tariff hikes, and anti-theft measures. Efforts to expand hydropower and local coal aim to reduce reliance on imported fuel.
Yet, the IIF cautions that reforms have failed to deliver lasting improvements. Recent debt reduction was achieved mainly through one-off loan settlements rather than structural fixes. Inefficiencies in distribution companies, persistent transmission losses, and weak collections ensure that the debt cycle continues unabated.
Reform deficit
The institute described circular debt as the clearest example of Pakistan’s stalled reforms, driven by vested interests and institutional inertia. “Until these structural hurdles are addressed, circular debt will keep eroding fiscal space, constraining growth, and fuelling economic instability,” the report concluded.
Story by Khaleeq Kiani
