Circular Debt: Are We Measuring the Right Problem?

October 01, 2026 (MLN): Pakistan’s circular debt debate often begins and ends with one number: the stock outstanding at the end of the financial year. But that number, important as it is, does not tell the whole story.

The more important question is what happened during the year. How much financial pressure entered the system? What caused it? How much was paid, adjusted or settled? And, most importantly, are the underlying causes of new accumulation being reduced?

At June 2026, power-sector circular debt stood at Rs. 1.675 trillion, compared with Rs. 1.614 trillion a year earlier, an increase of only Rs. 61 billion. At first glance, this appears relatively modest. But the annual flow tells a much larger story.

During FY2025–26, the system recorded Rs. 609 billion in gross additions. After reported reductions and other accounting adjustments, the reported gross flow was around Rs. 364 billion. Stock payments of around Rs. 302 billion subsequently helped contain the increase in the accumulated stock. (Power Division, June 2026 Circular Debt data)

These figures should not be treated as alternative estimates of the same number. They represent different stages of the circular-debt accounting process. Rs. 609 billion reflects gross additions; Rs. 364 billion is the reported flow after reductions and adjustments; and Rs. 61 billion is the net change in the closing stock. (Power Division, FY2025–26 Circular Debt data)

This distinction matters because the Rs. 61 billion increase does not represent the amount of financial pressure created during the year. A substantial volume of new liabilities can be offset through payments, subsidies, adjustments and other measures, leaving a much smaller change in the closing stock.

If Rs. 609 billion can enter the system as gross additions while the closing stock rises by only Rs. 61 billion, the Rs. 61 billion figure alone cannot tell us whether the system is becoming financially healthier. The more important question is whether the pipeline of new financial pressure is shrinking.

That is why the policy conversation needs to move from simply asking, “How much circular debt is there?” to asking, “How much new circular debt is being created, why is it being created, and who is responsible for it?”

The composition of the FY2025–26 flow provides an important warning. DISCO operational inefficiencies were reported at around Rs. 262 billion, while weak recoveries accounted for around Rs. 64 billion. K-Electric’s non-payment was around Rs. 194 billion. These figures point to operational, commercial and institutional issues rather than merely an accounting problem. (Power Division, FY2025–26 Circular Debt data)

There is also an important improvement that should be recognized. Power-sector circular debt fell from Rs. 2.393 trillion at the end of FY2023–24 to Rs. 1.614 trillion at the end of FY2024–25, a reduction of Rs. 780 billion. The government attributed this reduction to improved DISCO performance, negotiated relief on late-payment interest and broader macroeconomic improvements. (Government of Pakistan, February 2026)

But reducing an existing stock and stopping the creation of new arrears are two different tasks. Payments can reduce accumulated debt without necessarily changing the behaviour that created it. If distribution losses, weak recoveries, delayed subsidies and institutional non-payment continue, the system can rebuild the debt after each settlement.

The broader energy picture makes this even more important. By June 2026, circular debt in the gas sector was reported at around Rs. 3.611 trillion, taking combined power and gas circular debt to approximately Rs. 5.286 trillion. (Official-source energy-sector data, June 2026)

This means circular debt is not simply a problem of settling old liabilities. It is a continuing financial mechanism within the energy system. If the causes of new arrears remain intact, periodic clearance of accumulated debt will provide only temporary relief.

Measure the flow, not just the stock

Pakistan needs a more transparent and disciplined circular-debt flow statement. Every month, the Power Division should publish five numbers together: opening stock, gross additions, reductions and adjustments, payments made, and closing stock.

More importantly, gross additions should be broken down by cause and institution. Policymakers should be able to see how much arose from distribution losses, under-recoveries, delayed subsidies, non-payment, interest, generation-related costs and other factors.

This would fundamentally improve the policy discussion. Instead of looking at a lower closing balance without understanding what happened underneath, policymakers could identify exactly where financial pressure is being created and whether those pressures are rising or falling.

From debt settlement to debt prevention

As an economic analyst, I believe Pakistan now needs to shift the focus from simply settling accumulated circular debt to preventing new debt from being created. Three practical steps can strengthen the system.

First, publish gross additions alongside the closing stock every month. The public and policymakers need to know not only how much debt remains, but how much was added, where it came from and which part of the system was responsible.

Second, improve the timing and discipline of subsidy payments. Approved subsidies should be released on time, properly targeted and transparently accounted for. Delayed payments can create financial pressure elsewhere in the energy chain even when the subsidy itself has already been budgeted.

Third, introduce quarterly targets for reducing new arrears. DISCOs, K-Electric and gas-sector entities should have measurable targets covering losses, recoveries, arrears and other controllable sources of financial deterioration. These targets should be linked to institutional performance and management accountability.

This is not an argument against settling existing circular debt. That remains necessary. But settling old debt and preventing new debt are not the same thing. Payments can reduce the accumulated stock, while unresolved operational and commercial weaknesses continue to generate fresh liabilities.

Pakistan should therefore judge progress through both measures. The stock tells us how much debt remains. The flow tells us whether the system is still producing it.

The Rs. 61 billion increase in power-sector circular debt during FY2025–26 is therefore only one part of the story. Behind that relatively small net increase was a much larger volume of financial pressure moving through the system.

The real test of reform should now be straightforward: Are gross additions falling? Are the causes of those additions being eliminated? And are the institutions responsible being held accountable?

Until these questions can be answered consistently in the affirmative, a lower or slowly rising circular-debt stock should not be mistaken for a solved problem

 About Author:

The writer, Shahid Anwar, is an Economic Analyst and former Secretary General of the Federation of Pakistan Chambers of Commerce and Industry (FPCCI).

He also served as Senior Director Research at the Institute of Cost and Management Accountants of Pakistan (ICMAP), with 36 years of experience in business, trade and economic affairs. He provides advisory support on trade, investment and business partnerships.

Disclaimer:

The above analysis/article is for informational and educational purposes only.

Copyright Mettis Link News