Pakistan’s power sector circular debt reached Rs1.68 trillion by June 2026, highlighting the persistent financial weakness of the country’s electricity system despite a significant improvement in power sector under-recoveries.
The latest data compiled by Arif Habib Limited Research and the Ministry of Energy Power show that circular debt increased by Rs61 billion during FY26. This marks a sharp reversal from FY25, when the government managed to reduce the stock by Rs780 billion.
The increase is particularly concerning because the improvement in several components of the power sector was overshadowed by growing payment problems involving distribution companies and K-Electric.
Power Sector Circular Debt Rises Despite Lower Under-Recoveries
The total circular debt stood at approximately Rs1.675 trillion in June 2026, compared with Rs1.614 trillion a year earlier, representing a year-on-year increase of about 4 percent.
Payables to power producers actually declined from Rs861 billion to Rs784 billion, while GENCOs’ liabilities to fuel suppliers slipped from Rs93 billion to Rs90 billion.
However, the structure of the debt has changed dramatically.
The amount previously parked with Power Holding Limited was removed from the reported liability structure after the government introduced a new Rs694 billion circular debt financing line in December 2025. Around Rs660 billion that had previously been held through PHL was reclassified as bank financing.
By June 2026, Rs129 billion of this financing had been repaid.
This accounting shift is important because the headline circular debt number does not tell the entire story. Part of the financial pressure has effectively moved from one balance sheet mechanism to another rather than disappearing.
K-Electric Non-Payment Becomes a Major Warning Sign
One of the most alarming developments in the latest circular debt data is the sharp increase in K-Electric’s non-payment.
K-Electric’s unpaid amount contributed Rs194 billion to the FY26 circular debt build-up, compared with only Rs4 billion in the previous year.
That represents a dramatic deterioration and deserves closer scrutiny from policymakers and regulators.
The issue is not merely the size of the unpaid amount. It also raises questions about payment discipline across the power market. If large entities can accumulate substantial liabilities without timely settlement, efforts to control circular debt elsewhere in the electricity chain become significantly harder.
DISCO Inefficiency Continues to Drain the Power Sector
Distribution companies remained another major source of pressure.
DISCO inefficiencies contributed Rs262 billion to the circular debt increase during FY26, broadly comparable with Rs265 billion recorded a year earlier.
Although this figure was relatively stable, it remains unacceptably large.
The data suggests that Pakistan’s circular debt problem is not simply a financing issue. It is also an operational problem involving electricity losses, weak collections, inefficient distribution networks and persistent gaps between the cost of supplying electricity and the amount recovered from consumers.
DISCO under-recoveries, however, showed meaningful improvement. They declined to Rs64 billion from Rs132 billion a year earlier.
This improvement indicates that tariff recovery and collection measures may be producing results. But the gains were not large enough to offset other sources of debt accumulation.
Government Payments Provide Only Temporary Relief
The government made Rs302 billion in stock payments to independent power producers during FY26. These payments provided the only major offset against the year’s gross circular debt build-up.
The gross increase in liabilities reached Rs364 billion, compared with only Rs45 billion during the previous year.
After accounting for the Rs302 billion in payments, the circular debt still increased by Rs61 billion.
This exposes the central weakness in the government’s strategy. Large cash injections can reduce accumulated liabilities, but they do not permanently resolve the structural causes of circular debt.
Other factors also influenced the final number. Prior-year recoveries and other adjustments added Rs75 billion, while unbudgeted or unclaimed subsidies reduced the build-up by Rs98 billion. Interest charges on PHL and IPP debt added Rs14 billion, while principal repayments reduced the increase by Rs129 billion. Pending generation costs related to quarterly tariff adjustments and fuel cost adjustments provided another Rs20 billion reduction.
Circular Debt Problem Needs Structural Reform
The latest figures should not be viewed as a simple improvement or deterioration story.
Pakistan has achieved progress in reducing under-recoveries and lowering some outstanding payments to power producers. Yet the overall circular debt stock remains extremely high, while new liabilities continue to emerge.
The sharp rise in K-Electric’s unpaid obligations is particularly significant. At the same time, continued DISCO inefficiencies show that the underlying distribution problem remains unresolved.
The government’s decision to refinance liabilities at lower rates, including the requirement to refinance amounts parked in PHL at KIBOR minus 0.9 percent, could reduce financing costs. However, cheaper borrowing cannot substitute for better governance, stronger collections, lower electricity losses and transparent settlement mechanisms.
Pakistan’s power sector circular debt will remain a recurring economic threat unless reforms focus on the causes rather than repeatedly financing the consequences.
What the Rs1.68 Trillion Debt Means for Consumers
The consequences ultimately extend beyond government accounts and power companies.
Persistent circular debt can increase pressure for higher tariffs, additional subsidies, delayed payments to generators and greater borrowing by the public sector. Consumers can therefore end up paying indirectly for inefficiencies elsewhere in the electricity chain.
The June 2026 figures offer a mixed picture. Under-recoveries have improved and payments to IPPs have increased, but the overall debt stock continues to rise.
For Pakistan, the real test is no longer whether circular debt can be temporarily reduced. The bigger question is whether policymakers can stop new debt from accumulating in the first place.