Earlier this year, the prime minister stood before the cameras and declared that Rs1.2 trillion of Pakistan's power sector circular debt had been cleared.
CIRCULAR DEBT
Earlier this year, the prime minister stood before the cameras and declared that Rs1.2 trillion of Pakistan's power sector circular debt had been cleared.It was framed as a headline achievement, a policy win to wave at the next IMF review, proof that the state had finally got its house in order. Banks were roped in to restructure old loans and extend fresh financing. Power producers were told their overdue payments were on the way.
Pakistan State Oil, the country's largest fuel supplier, was billed as one of the biggest beneficiaries of the entire exercise. It wasn't. Nine months on, PSO still hasn't seen the cash it was promised, and the debt has, in fact, grown.
The numbers tell a story that no press conference will. PSO's receivables have not shrunk since that announcement; they have swelled past Rs900 billion. More than half of that figure, over Rs500 billion, is owed by a single entity: Sui Northern Gas Pipelines Limited, itself a state-owned company. This is not a case of a private defaulter dodging its obligations or a rogue distribution company gaming the system. This is one arm of the state failing to pay another, while the government tells the public and the IMF that the problem has been resolved.
And the picture beyond PSO is no better. Despite a written commitment to the IMF to hold circular debt flat, the sector-wide stock has kept climbing through the fiscal year, comfortably missing the government's own zero-net-addition target. A trillion-rupee clearance was announced. The debt grew anyway. That is not a rounding error or an accounting quirk. It is the state borrowing from Peter to avoid paying Paul, then holding a press conference to announce that Paul has been paid in full.
This ought to matter to people who have never read a circular debt report and do not own a single PSO share, because fuel supply is not a niche corporate issue but a matter of national security. PSO imports the crude oil, the RLNG and the jet fuel that keep the power plants running, the factories turning and, not incidentally, the national airline in the air. When the country's largest fuel supplier is starved of cash because other state-owned entities will not settle their bills, the exposure belongs to the whole economy. A country does not run out of fuel overnight; it chokes slowly, invoice by unpaid invoice, long before anyone outside the finance ministry notices the tank running dry.
When the country’s largest fuel supplier is starved of cash because other state-owned entities will not settle their bills, the exposure belongs to the whole economy
So if the circular debt is not being resolved and PSO is not being paid, the obvious question is where the money is actually going. The answer is the banks. Unable to collect the more than Rs 500 billion it is owed by SNGPL alone, PSO is not simply waiting patiently for the government to sort out its internal IOUs -- it is borrowing heavily from commercial banks to fund its working capital, just to keep fuel moving while Islamabad's ledgers stay unreconciled. That borrowing carries a rate. That rate is effectively guaranteed. And it is underwritten, one way or another, by the sovereign itself.
Seen from a banker's chair, the incentive is obvious: why take on the risk of lending to a private manufacturer, an exporter or an SME that could genuinely default, when you can lend instead to a state-owned enterprise trapped in a circular debt loop and collect a government-backed spread year after year, with next to no credit risk attached? Banks in Pakistan do not need to compete for private-sector borrowers when the state itself, tripping over its own unpaid bills, is such a reliably profitable client.
Pakistan's banking sector has long been criticised for its preference for government paper over private credit -- for parking money in treasury bills rather than lending it to entrepreneurs and industry. Circular debt financing is that same instinct wearing a different suit: a mechanism that quietly converts a policy failure into a guaranteed income stream for the banking sector. Which brings us to the question nobody wanted asked: when the institutions profiting most from the debt staying unresolved are also among the loudest voices in the country's economic policymaking, what real incentive is there to fix it? Untangle the circular debt properly, and PSO gets paid, SNGPL settles its books and a highly profitable, virtually risk-free lending relationship disappears overnight. Leave the knot tied, and the returns keep flowing exactly as they have for years.
Rs1.2 trillion was announced as cleared. Circular debt rose anyway. PSO is still owed north of Rs500 billion by a fellow state-owned enterprise, and the working capital gap in between is being bridged by bank borrowing at guaranteed rates-- capital that would otherwise be financing the real economy.
Pakistan's circular debt crisis was never purely a liquidity problem. It is an incentive problem, dressed up as a technical one. Until someone with actual power over this system has a genuine reason to want it solved, the press conferences will keep coming, the announcements will keep being made, and so will the invoices that nobody actually pays.
The writer is a management professional in a multinational company.
