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Pakistan’s energy sector circular debt has long transitioned from an economic Achilles’ heel into a critical national security vulnerability, paralysing state-owned enterprises (SOEs) and bleeding the federal treasury.
Now standing at a staggering Rs5.3 trillion, the crisis has trapped successive governments for decades in a cyclical quagmire: securing inflationary sovereign loans and commercial bank bailouts that momentarily inject liquidity but leave the underlying structural erosion intact.
As of June 2026, circular debt in the power sector stands at approximately Rs1.68 trillion, alongside Rs3.61 trillion in the gas sector. This multi-trillion-rupee paralysis describes a chain of unpaid liabilities running from consumers through distribution companies to generators, fuel suppliers and gas producers, where every vital organ of state infrastructure is choked because it itself has not been paid. It is, without hyperbole, the single largest structural threat to Pakistan’s fiscal stability and sovereign operational readiness after direct debt servicing.
The state has attempted to clear this debt four times: in 1998, 2012, 2020 and again in 2024. Each attempt was heralded as a definitive resolution; each merely suppressed the headline numbers temporarily. Within three to four years, the debt aggressively reconstituted itself, returning to or exponentially surpassing its original baseline. Four uniform failures with the exact same outcome are not bad luck; they are best described by the immortal line: ‘insanity is doing the same thing over and over again, but expecting different results’.
To understand why every previous attempt failed, one must dissect what the Rs5.3 trillion figure actually comprises -- a fundamental diagnostic question routinely ignored. Circular debt is not a monolithic commercial obligation. It is an accumulation of structurally diverse claims arising between parties standing in fundamentally distinct relationships to the state. A massive portion of it is not commercial debt in the traditional sense at all. Yet, successive civilian stabilisation programmes have treated the entire stock as an external liability, borrowing at crippling commercial rates to service internal friction. This profound diagnostic error is precisely why capital evaporates and the debt returns.
Properly analysed through rigorous legal and financial forensic engineering, a substantial part of this liability can be permanently extinguished by mechanisms that have never been systematically deployed – without a single rupee of new financing; without waivers by any party; and without loss to any shareholder. The consequences of 30 years of institutional misdiagnosis have been severe: paralysed SOEs; frozen upstream energy investment; and fuel supply chains brought to the absolute precipice of structural failure.
At a time when Pakistan is navigating unprecedented, multi-front security crises on its borders, this fiscal cannibalisation of the exchequer is strategically indefensible. Servicing the energy sector’s accumulated internal arrears at commercial bank rates extracts vital capital from struggling households and actively crowds out the state’s ability to fund existential national security imperatives, defence modernisation and strategic procurement.
The public record lays bare the cost of this policy failure. Most recently, Rs1.275 trillion was raised from a syndicate of eighteen commercial banks under an Islamic financing facility priced at three-month KIBOR less 0.9 per cent, repayable over six years and serviced by a punitive surcharge of Rs3.23 per unit on electricity consumers. Against this principal, the government committed to repayments capped at Rs1.938 trillion, funded by an annual allocation of Rs323 billion.
This represents a staggering Rs663 billion in deadweight financing costs – more than half the sum borrowed – to refinance domestic obligations that never required commercial financing in the first place. To put this in perspective for state planners: the financing fees on this single facility alone consume massive state resources, acting as an external drag on national power at the exact moment the state needs maximum fiscal resilience. Across the estimated Rs2 trillion of commercial bank exposure to the energy sector, annual financing costs hover around Rs200 billion recurring – borne entirely by the exchequer and desperate consumers.
While it was claimed this facility would not add to public debt because it sits within a state-owned holding company, this is a cosmetic fiction. In every sense that impacts sovereign survival -- a state-owned borrower, a state-imposed surcharge and Rs323 billion a year of committed national resources – it is a sovereign obligation positioned aggressively outside official debt statistics. Rs663 billion is not a bookkeeping entry; it is vital national capital.
A groundbreaking architecture proprietary to the author is now emerging to permanently dismantle this multi-trillion-rupee liability without on- or off-balance-sheet sovereign borrowing. Moving away from traditional, wealth-destroying bailouts, this model relies on advanced algorithmic modelling and precise financial-legal engineering. Rather than borrowing money to temporarily plug arrears, this methodology systematically de-risks the balance sheets of energy SOEs and forces contractual remediation. Entities that are today a permanent drain on the treasury are transformed into highly solvent assets that the state can either operate profitably or cleanly privatise.
Stated conservatively, the ready-to-execute strategic yield of this architecture delivers: one, headline stock reduction: In excess of Rs2 trillion eliminated from the headline stock within nine to twelve months – requiring no waivers, no write-offs and no further borrowing.
Two, genuine public relief: Approximately Rs2.00-2.80 per unit of permanent tariff relief, the first genuine reduction any program has ever offered. Three, long-term fiscal space: Recurring savings whose present value, discounted conservatively over ten years, exceeds Rs5 trillion.
Four, equity value restored: Up to Rs4.8 trillion in unlocked equity value restored to listed SOEs by reversing severe stock-market and accounting discounts. Five, indigenous energy stimulus: Rs300-400 billion in stranded capital structurally released directly to Exploration & Production (E&P) companies to fund immediate domestic drilling, which in turn saves an annual $1.5bn-$2.5 billion of foreign exchange.
Six, impairment avoidance: Immediate avoidance of a looming Rs 400-500 billion accounting impairment currently threatening the energy sector’s balance sheets.
The downstream strategic effects of this engineering on the nation’s import bill and foreign exchange reserves are transformative. Indigenous gas production is declining at roughly 7-9 per cent per annum, forcing reliance on imported LNG landing at astronomical rates during global supply disruptions. At the same time, national exploration giants – Mari; OGDCL; PPL; and Government Holdings – are sitting on enormous unpaid receivables, paralysing their drilling programmes.
This framework unlocks and injects several hundred billion rupees of stranded capital directly back into upstream investment. Every additional unit of domestic gas production directly displaces a dollar-denominated import. This is permanent import substitution in the largest line of the current account, ensuring that vital foreign exchange remains within state reserves. The wells stay drilled.
This model also rescues the state’s privatisation and investment programme by giving the Special Investment Facilitation Council an immediate, actionable victory. The value of listed SOEs would increase by up to Rs4.8 trillion. The gas utilities recently sought exemption from international accounting standards to conceal insolvency, a request the Cabinet Committee on SOEs rightly declined. Without this algorithmic resolution, the sector faces an imminent Rs400-500 billion accounting impairment cliff-edge.
This model removes the underlying cancer rather than concealing it; restores clean audit opinions; and lets these strategic assets borrow on their own credit rather than relying on sovereign guarantees. It drastically upgrades what the state can realise from distribution company transactions currently in the market; audited balance sheets are balance sheets that can be aggressively sold.
Crucially, the alignment with the International Monetary Fund (IMF) is direct rather than approximate. The approach requires no new borrowing, no monetary financing, no accumulation of arrears and no additional levy on consumers. It reduces the flow the programme is designed to contain rather than merely refinancing the stock. It is, in the Fund’s own vocabulary, a “structural measure” rather than a financing measure -- and the distinction is not cosmetic.
What is proposed here operates completely inside every IMF programme constraint while addressing the very thing the constraints have failed to fix.
The writer is a London-based barrister.
