---
title: "Circular Debt Definition and Impact | Model Diplomat"
description: "Circular debt refers to unpaid liabilities in Pakistan's power sector, impacting revenue flow and crucial for policy researchers and Model UN students."
url: "https://modeldiplomat.com/learn/glossary/circular-debt"
---

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Model Diplomat Research Team · Last reviewed June 22, 2026

TL;DR

- Circular debt is the cascading, unpaid liability that accumulates across Pakistan's power-sector payment chain when revenue shortfalls prevent distribution companies, generators, and fuel suppliers from settling their…
- What is the basic mechanism that creates circular debt?
- Which institutions form the circular debt chain in Pakistan?
- How is circular debt linked to IMF programmes?
- What reforms are proposed to resolve circular debt?

[Civil Service & Diplomatic Exams](https://modeldiplomat.com/learn/civil-services/glossary)Updated June 22, 2026

Circular debt is the cascading, unpaid liability that accumulates across Pakistan's power-sector payment chain when revenue shortfalls prevent distribution companies, generators, and fuel suppliers from settling their dues.

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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.

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[Economy Development Challenges](https://modeldiplomat.com/learn/lessons/css-pakistan-affairs-economy-development-challenges)[Policy Challenges Water Energy Demography](https://modeldiplomat.com/learn/lessons/css-pakistan-affairs-policy-challenges-water-energy-demography)

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