(By Khalid Masood)
Background and Origins
Pakistan’s power sector circular debt emerged prominently around 2006 as a systemic financial malaise rooted in structural inefficiencies and policy distortions. It forms a vicious cycle: distribution companies (DISCOs) incur high transmission and distribution (T&D) losses—often exceeding 20% due to outdated infrastructure and technical faults—compounded by rampant electricity theft, poor bill recovery rates (frequently below 90%), and delayed or inadequate government subsidy payments. Politically motivated tariffs that fail to reflect full cost recovery force DISCOs to underpay generation companies, which in turn delay payments to fuel suppliers, leading to operational disruptions, load-shedding, and escalating interest on overdue amounts. Independent Power Producers (IPPs), introduced in the 1990s to attract private investment, have contributed through capacity payments for underutilized plants, further inflating costs amid overcapacity and reliance on imported fuels.
The debt ballooned to around Rs 2.4 trillion by mid-2025, straining fiscal resources and economic growth.
Current Status and Recent Progress
Significant strides have been made in 2025. By the end of FY2025 (June 2025), the circular debt stock was reduced to approximately Rs 1.614 trillion through measures like improved recoveries, anti-theft campaigns, and IPP contract renegotiations—a drop of about Rs 780 billion from the previous year. In September 2025, the government signed a landmark Rs 1.225 trillion syndicated financing facility with 18 commercial banks at favorable rates (KIBOR minus 0.9%), restructuring existing liabilities without imposing new consumer burdens. Repayments are serviced through an existing Rs 3.23 per unit surcharge, with the plan aiming for full stock elimination within six years—by 2031—potentially reducing electricity bills by removing this surcharge.
In a major milestone, on December 10-11, 2025, the government completed a record Rs 659.6 billion settlement of Power Holding Limited (PHL) liabilities, including Rs 399.6 billion in sukuk redemptions and Rs 259.7 billion in syndicated facilities—Pakistan’s largest-ever debt market transaction. This has injected liquidity, eased interest costs, and demonstrated strong institutional confidence in reforms. The International Monetary Fund (IMF) has mandated zero net inflows for the current fiscal year (FY2025-26), with projections indicating risks of up to Rs 735 billion in additions if not controlled, though recent actions aim to cap flows and maintain stability.
Case Study: India’s UDAY Scheme – Lessons in Debt Restructuring
India faced a similar crisis with state-owned DISCOMs accumulating massive losses and debts due to subsidized tariffs (especially for agriculture), high AT&C (Aggregate Technical & Commercial) losses, and populist pricing. In 2015, the central government launched the Ujwal DISCOM Assurance Yojana (UDAY), a voluntary scheme where states took over 75% of DISCOM debts (converted to state bonds), reducing interest costs significantly. Participating states committed to operational reforms: reducing AT&C losses to 15% by 2019, timely tariff hikes, and feeder separation for better theft control.
Outcomes were mixed but instructive. UDAY slashed DISCOM debt burdens initially, improving financial viability and enabling infrastructure investments. Losses declined in states like Maharashtra, Rajasthan, and Tamil Nadu, with some achieving substantial reductions (e.g., Rajasthan by over 50%). Bond issuance lowered borrowing costs, and operational efficiency improved marginally. However, targets were largely missed nationally—AT&C losses remained high, and debts resurfaced post-2020 due to COVID-19 impacts and political reluctance for tariff rationalization. By 2024, DISCOM losses totaled ₹7.08 trillion with ₹7.42 trillion in debt, prompting a successor Revamped Distribution Sector Scheme (RDSS) emphasizing privatization and smart metering.
For Pakistan, UDAY highlights the value of state-backed debt takeover for immediate relief but underscores that without sustained political will for loss reduction and tariff reforms, debt can recur. Pakistan’s 2025 plan mirrors this by restructuring without new burdens, but must prioritize enforcement to avoid India’s partial setbacks.
Recommendations for Permanent Elimination
To break the cycle sustainably by 2031 and beyond, Pakistan should adopt a multi-pronged, structural approach:
- Operational Efficiency Overhauls: Accelerate DISCO privatization or corporatization, breaking them into smaller units for accountability. Invest in smart metering, grid upgrades, and anti-theft technology to cut T&D losses below 15%. Enforce strict penalties for theft and aim for 100% bill recovery through digital payments and incentives.
- IPP Contract Rationalization and Energy Mix Shift: Continue renegotiating outdated agreements, moving to competitive “take-and-pay” models. Prioritize renewables (hydropower, solar, wind) to reduce fuel import dependency and capacity payment loads. Fully implement the Competitive Trading Bilateral Contract Market (CTBCM) for market-based pricing.
- Tariff Reforms and Targeted Subsidies: Automate quarterly adjustments for full cost recovery via NEPRA, while shifting to direct, targeted subsidies for vulnerable consumers (e.g., via Benazir Income Support Programme integration) to minimize fiscal drain and political interference.
- Governance and Institutional Strengthening: Ensure prompt subsidy releases and zero budgetary shortfalls. Enhance regulatory independence and transparency in CPPA-G operations. Monitor IMF-mandated zero inflows rigorously.
- Long-Term Sustainability: Integrate climate goals by expanding renewables, fostering public-private partnerships for grid modernization, and building resilience against fuel price volatility.
Conclusion
Pakistan’s power sector circular debt has long been a drag on economic progress, but the bold reforms of 2025—culminating in the Rs 1.225 trillion restructuring and the historic Rs 659.6 billion December settlement—mark a turning point toward sustainability. By combining innovative financing with unwavering commitment to structural changes, Pakistan has a realistic path to eliminating this debt by 2031, achieving zero annual inflows, and unlocking affordable, reliable electricity. Success will depend on sustained political resolve, transparent execution, and learning from global experiences like India’s UDAY scheme. If implemented fully, these efforts could transform the energy sector into a driver of industrial growth, fiscal stability, and improved living standards for millions of Pakistanis.
