ISLAMABAD: Pakistan’s power sector circular debt increased by Rs364 billion during fiscal year 2025-26, as distribution companies struggled with inefficiencies and low bill recoveries while payment disputes with K-Electric added further pressure.

The increase came despite the government providing around Rs302 billion in subsidies to contain the debt. The latest rise was Rs319 billion, or 709%, higher than the increase recorded in the preceding fiscal year.

According to the June 2026 circular debt report, inefficiencies in power distribution companies accounted for Rs262 billion of the increase. Lower electricity bill recoveries added another Rs64 billion, while interest charges contributed about Rs14 billion.

K-Electric was responsible for another Rs194 billion increase in the debt flow because of non-payments linked to a dispute over the delayed finalisation of its multi-year tariff by the National Electric Power Regulatory Authority.

A further Rs75 billion was added because of delays in tariff adjustments.

The government, meanwhile, paid Rs129 billion in principal loans related to the power sector, preventing the circular debt flow from rising even further. The Power Division also reported a Rs98 billion reduction in the debt flow because of subsidy payments.

Budget shortfall adds to debt pressure

The government had allocated Rs893 billion for the power sector in the FY2025-26 budget but subsequently reduced the allocation by Rs98 billion.

A Power Division spokesperson said the circular debt could have declined to approximately Rs1.577 trillion if the full budget allocation had been released.

Instead, the shortfall contributed to an increase of Rs61 billion during the fiscal year, according to the official.

The International Monetary Fund had allowed Pakistan to add up to Rs400 billion to the circular debt flow while requiring the government to eventually bring the flow to zero through budgetary subsidies.

The continued accumulation of debt has raised concerns over governance, distribution losses, bill recovery and tariff management in the electricity sector.

Distribution companies remain major source of losses

Power distribution companies generated Rs262 billion in losses because of inefficiencies during FY2025-26, only Rs3 billion below the previous year’s figure.

Lower recovery of electricity bills contributed another Rs64 billion to the circular debt, although this was 51% lower than the amount recorded a year earlier.

The government has started the privatisation process for three relatively profitable distribution companies: Faisalabad Electric Supply Company, Gujranwala Electric Power Company and Islamabad Electric Supply Company.

However, the planned privatisation is unlikely to immediately address losses generated by other distribution companies.

A previous proposal suggested combining profitable companies with loss-making entities before privatisation, but the government has reportedly abandoned that approach in favour of selling the profitable companies separately.

Trump Vows ‘Never-Seen-Before’ Economic Pressure on Iran as US Weighs New Sanctions

K-Electric dispute adds Rs194 billion

K-Electric’s outstanding payments contributed significantly to the latest circular debt increase.

The company has disputed payments linked to electricity supplies amid delays in finalising its multi-year tariff by NEPRA. The dispute resulted in Rs194 billion being added to the circular debt flow.

Another Rs14 billion came from interest charges, costs that are ultimately recovered from consumers through electricity bills.

The government also added Rs75 billion because of delayed tariff adjustments.

Consumers continue to bear the burden

For more than a decade, successive governments have relied on tariff adjustments, subsidy reforms and additional electricity charges to control the circular debt.

These measures have slowed the accumulation of debt at various points but have also increased the financial burden on consumers.

The continuing rise in electricity prices has encouraged many consumers to move away from the national grid and install rooftop solar systems, further challenging the financial sustainability of the power distribution system.

The latest Rs364 billion increase highlights the persistent structural problems in Pakistan’s electricity sector, particularly distribution inefficiencies, weak recoveries, tariff delays and unresolved payment disputes.