Circular debt denotes the chain of overdue payment obligations that builds up within Pakistan's electricity supply system when cash inflows fail to match the cost of generating and delivering power. The mechanism originates at the consumer end and works backward: state-owned Distribution Companies (DISCOs) fail to recover the full billed amount because of theft, under-recovery, line losses, and unpaid government and agricultural subsidies. The shortfall passes to the Central Power Purchasing Agency (CPPA-G), which therefore cannot fully pay the Independent Power Producers (IPPs) and public generation companies (GENCOs). These in turn default on payments to fuel suppliers — Pakistan State Oil (PSO), Sui Northern Gas Pipelines (SNGPL), and LNG importers — who then cannot clear their own import bills. The "circular" character arises because each link's default propagates through the entire chain, freezing liquidity sector-wide.
The structural drivers are well documented in Pakistan's economic surveys and IMF programme reviews. They include the gap between the National Electric Power Regulatory Authority (NEPRA)-determined cost of service and the government-notified consumer tariff (the "tariff differential subsidy"), delayed or unbudgeted subsidy releases by the Ministry of Finance, aggregate technical and commercial (AT&C) losses far above regulatory benchmarks, and the heavy capacity-payment burden owed to IPPs under take-or-pay clauses of the 1994 and 2002 power policies. Currency depreciation inflates the rupee cost of imported furnace oil, coal, and LNG, widening the gap further. The stock of circular debt is distinct from the flow: governments periodically "park" accumulated arrears in the Power Holding Limited (PHPL), converting it into formal sovereign-guaranteed debt, which masks but does not extinguish the problem.
The circular debt stock has risen from roughly Rs 161 billion in 2008 to figures exceeding Rs 2.3–2.6 trillion by the mid-2020s, making it a recurring structural benchmark under successive IMF Extended Fund Facility arrangements, including the 2024–2025 EFF. Remedial measures have included the Circular Debt Management Plan (CDMP), recurrent tariff rationalisation and quarterly/fuel-cost adjustments notified by NEPRA, anti-theft drives, IPP contract renegotiation in 2020–2021 to convert dollar-indexed returns and reduce capacity payments, and in 2025 a government scheme to retire a large tranche of debt through bank financing backed by the Debt Servicing Surcharge levied on consumer bills. The persistence of the problem reflects unresolved governance failures in DISCOs and the political difficulty of passing full costs to consumers.
For the CSS examination, circular debt is a core theme in Pakistan Affairs and overlaps with the Current Affairs and Economics optional papers. Candidates are typically asked to define the concept, trace the payment chain link by link, enumerate causes (line losses, subsidy gaps, capacity payments, rupee depreciation), and propose reforms (DISCO privatisation, tariff reform, transmission upgrades, renewable shift). A strong answer cites named institutions — NEPRA, CPPA-G, PHPL, IPPs — quantifies the debt stock with dated figures, and links the issue to IMF conditionality and Pakistan's wider fiscal and balance-of-payments stress.
Example
In 2025, Pakistan's government launched a scheme to retire roughly Rs 1.25 trillion of power-sector circular debt through commercial bank loans serviced by the Debt Servicing Surcharge on electricity bills, a measure tied to its IMF programme.
Frequently asked questions
Distribution companies under-recover billed revenue due to theft, losses, and unpaid subsidies, so they cannot fully pay generators; generators then default on fuel suppliers. Each default cascades backward through the payment chain, freezing liquidity across the entire power sector.