Pakistan’s energy sector has once again emerged as a critical drag on the economy, with accumulated liabilities now crossing Rs4.6 trillion, roughly 4% of GDP. Despite repeated bailouts and partial reforms, the crisis remains unresolved, leaving lasting scars on growth, inflation, and fiscal stability.
A recent study by the Institute of International Finance (IIF) highlights how chronic weaknesses—ranging from theft and weak bill collection to inefficient distribution companies—have kept the country locked in a cycle of debt and mismanagement.
Circular Debt: A Never-Ending Spiral
The so-called circular debt has haunted Pakistan since 2006. Every government has tried firefighting measures—most recently an Rs800 billion payout—but the debt keeps returning.
By June 2025, circular debt in the power sector alone had reached Rs1.6 trillion, while another Rs3 trillion was owed to the oil and gas supply chain. Together, these liabilities form a black hole that absorbs public money without fixing underlying flaws.
The government created Power Holding Limited (PHL) to manage the debt, but by shifting PHL’s obligations onto national accounts, Islamabad only expanded its own burden. Currently, circular debt makes up 2.2% of total government debt, not counting arrears owed by state-run generation companies.
Broader Economic Fallout
The IIF report stresses that the issue is not just fiscal. Reliance on bank borrowing through PHL has squeezed private sector credit, discouraging business investment. On the real economy side, recurring load-shedding in low-recovery areas undermines industrial output and productivity.
Rising electricity tariffs—often necessary to cover losses—have become a direct driver of inflation. Meanwhile, dependence on imported fuels deepens trade deficits, particularly when the rupee weakens.
Policy Moves: Some Progress, But Not Enough
Authorities have introduced measures aimed at breaking inefficiencies. Among them:
- Launching the Competitive Trading Bilateral Contract Market (CTBCM) to let big consumers bypass distribution companies.
- Renegotiating contracts with independent power producers to shift from take-or-pay to take-and-pay terms.
- Raising tariffs, narrowing subsidies, and tightening recovery systems to cut theft and losses.
- Gradually pivoting towards local energy sources such as hydropower and coal to ease dependence on costly imports.
These steps show intent, but the IIF argues they lack the depth to produce lasting results. The recent dip in circular debt, for instance, was achieved mainly through commercial loans, not real reforms.
Why Reforms Keep Failing
Experts say the obstacles are not technical—they are political. Distribution losses, poor recoveries, and resistance from vested interests keep reforms from taking hold. The IIF bluntly calls the energy crisis the clearest example of why Pakistan’s reform agenda consistently underdelivers.
Without tackling these entrenched inefficiencies, the country will remain trapped in a cycle of bailouts and mounting debt. The cost is already visible: shrinking fiscal space, slower growth, and rising instability.
