Budget Cuts Push Pakistan’s Power Sector Circular Debt Higher
Pakistan’s power sector circular debt increased to Rs1.675 trillion by the end of fiscal year 2025-26, with the Power Division attributing the rise to a reduction in budgeted financial support by the Ministry of Finance. According to the ministry, the Pakistan power sector circular debt would have declined further had the full budget allocation for the sector been released.
In a statement issued on Tuesday, the Power Division said the circular debt, excluding K-Electric, rose to Rs1.675 trillion on June 30, 2026, compared with Rs1.614 trillion a year earlier. The division maintained that the increase was not caused by operational weaknesses but by a reduction in government funding during the fiscal year.
The Power Division stated that a Rs98 billion cut in the allocated budget resulted in an additional Rs61 billion being added to the circular debt stock.
The ministry has not yet released its end-of-year financial report, explaining that the document is still awaiting regulatory and statutory approvals.
Budget Reduction Blamed For Circular Debt Increase
The Power Division said the federal government had initially earmarked Rs893 billion for the power sector in the FY2025-26 budget. However, it said a further Rs98 billion was deducted under the government’s austerity measures before the budget was finally approved.
According to the division, if the power sector had received the full amount originally allocated, the circular debt would have fallen to approximately Rs1.577 trillion instead of increasing.
Budget documents presented to Parliament showed that Rs1.036 trillion had originally been proposed for power sector subsidies. The allocation was later revised to Rs893 billion during the presentation of the FY2026-27 federal budget. The Power Division now says another Rs98 billion reduction effectively lowered the subsidy allocation to Rs795 billion, limiting the government’s ability to reduce outstanding liabilities.
The ministry argued that the increase in circular debt should therefore be viewed as a temporary financial consequence of reduced budgetary support rather than evidence of deteriorating sector performance.
IMF Targets And Government Commitments
The increase comes despite Pakistan’s commitment under its International Monetary Fund (IMF) programme to prevent any further accumulation of circular debt while gradually reducing the overall stock.
The Power Division noted that Pakistan successfully achieved its end-December 2025 circular debt target, a milestone that was acknowledged and appreciated by the IMF during programme reviews.
Officials maintained that the latest increase was largely driven by fiscal adjustments rather than failures in reform implementation, stressing that the government’s broader commitments under the IMF programme remain unchanged.
Distribution Company Losses Continue To Decline
While explaining the rise in circular debt, the Power Division highlighted improvements in the operational performance of state-owned electricity distribution companies (DISCOs).
According to the ministry, distribution company losses declined significantly over the past two fiscal years.
Losses stood at Rs591 billion in FY2023-24 before falling by Rs193 billion to Rs397 billion in FY2024-25.
During FY2025-26, the Power Division said those losses were reduced further to Rs326 billion, representing a cumulative decline of Rs265 billion over two years.
Officials described the reduction as evidence that ongoing reforms aimed at improving operational efficiency, reducing electricity theft, and strengthening financial management are beginning to deliver measurable results.
Power Division Defends Reform Programme
The Power Division insisted that recent financial data demonstrate continued progress in restructuring Pakistan’s electricity sector.
It said the reforms introduced across the energy sector have strengthened operational performance while reducing financial losses, despite budgetary pressures faced by the government.
According to the ministry, the latest increase in Pakistan power sector circular debt should not be interpreted as a reversal of reform efforts because it resulted primarily from lower-than-expected budgetary support rather than inefficiencies within power companies.
Officials maintained that improvements in the financial health of distribution companies reflect sustained policy implementation and better governance across the sector.
Govt Reaffirms Commitment To Sustainable Energy Sector
The Power Division said it remains committed to continuing reforms designed to make Pakistan’s electricity sector financially sustainable while ensuring reliable power supply for consumers.
It reiterated that the budget reduction was a temporary fiscal measure linked to broader government austerity efforts and not an indication of weakening sector performance.
Going forward, officials said the government will continue implementing structural reforms aimed at reducing losses, improving recoveries, strengthening the financial position of power companies, and gradually lowering the country’s circular debt in line with commitments made under the IMF programme.