The Silent Transition in Circular Debt: Fiscal Year Closes, Market Awaits Clarity

By Hissan Ur Rehman

As Pakistan's fiscal year 2025 came to a close on June 30, a significant financial milestone outlined under the country's reform agenda— circular debt resolution— remains a focal point for policy watchers and capital market participants alike.

Estimated at Rs 2.4 trillion, or 2.1% of GDP, the circular debt in the power sector has long posed a structural challenge to energy supply chains, liquidity, and the financial performance of listed public sector enterprises.

According to the IMF's Country Report No. 25/109 released in May 2025, the Government of Pakistan committed to clearing the entire Rs 2.444 trillion in circular debt by the end of FY25. This was to be achieved through a multipronged strategy involving:

- Rs 348 billion in renegotiated payables with Independent Power Producers (IPPs)
- Rs 254 billion in additional budgeted subsidies
- Rs 387 billion in waived interest liabilities
- Rs 1,252 billion in syndicated Islamic financing from a consortium of 18 commercial banks

The syndicated financing, in particular, was designed to unlock critical payments to the Central Power Purchasing Agency (CPPA-G), which would then trickle through the power supply chain, benefiting GENCOs, IPPs, SNGPL, and ultimately state-owned oil marketing giants like Pakistan State Oil (PSO).

As of the first trading day of FY26, the capital markets are still awaiting official confirmations from PSX-listed companies on the receipt of circular debt payments. Companies like PSO, OGDC, and PPL have historically reported significant receivables from the power sector.

For instance, PSO’s receivables from SNGPL and the power sector stood at approximately Rs 732 billion as of Q3 FY25.

There are credible reports that the relevant ministries have issued letters to state-owned enterprises, requesting internal reconciliation of circular debt settlements.

This indicates administrative progress and backend alignment. However, no material disclosures have been made public through the PSX, which investors traditionally rely on for transparent and timely information.

To understand the potential impact, consider this: PSO is expected to receive Rs 66.2 billion in pending receivables, which translates to approximately Rs 141 per share in cash terms based on current shareholding.

This inflow would not impact earnings directly—since the revenue was recognized earlier—but it would significantly strengthen PSO’s liquidity position, reduce debt reliance, and enhance dividend-paying capacity.

At present, PSO’s Price-to-Free Cash Flow (P/FCF) ratio stands around 4.3x, based on its trailing free cash flow of Rs 38.3 billion. If the Rs 66.2 billion is received and market capitalization adjusts to reflect the stronger balance sheet, this ratio could shift upward, though it would remain competitively attractive relative to regional peers. This highlights the importance of circular debt clearance not just from a policy standpoint, but as a catalyst for valuation re-rating.

In parallel, PSO is reportedly entering a strategic joint venture with Hub Power Company (HUBC), backed by China’s BYD group. The purpose: to roll out a nationwide electric vehicle (EV) charging infrastructure using PSO’s widespread retail footprint.

If executed successfully, this initiative could signal a transformative pivot in PSO’s business model—from conventional fuel distribution to next-generation energy solutions.

The circular debt resolution and EV infrastructure plan, taken together, represent a confluence of balance sheet normalization and forward-looking diversification.

While current disclosures are limited, the policy framework and strategic direction suggest a promising outlook.

For investors and market participants, what matters now is timely communication. Transparent signals from the companies and regulators involved will further strengthen capital market credibility and investor confidence.

As Pakistan transitions into FY26, the groundwork laid in FY25—through fiscal reforms, strategic partnerships, and sectoral modernization—may very well lay the foundation for a re-rated energy sector.

But clarity and follow-through will determine whether that potential translates into performance.

The writer is a graduate of LUMS and MBA in Consulting from UK. He teaches financial markets in Pakistan and can be reached at hissan3@gmail.com

Disclaimer: This article is for informational purposes only and does not constitute investment advice.