Pakistan’s power sector circular debt has once again increased sharply after showing signs of improvement during fiscal year 2025, raising fresh concerns about the country’s ongoing energy sector challenges.

According to the Pakistan Electricity Review 2026, the circular debt of the power sector had declined significantly during FY25 before rebounding within a few months. The report stated that circular debt dropped by 32.5 percent year-on-year to Rs. 1.61 trillion by June 2025, compared to Rs. 2.39 trillion recorded a year earlier.

Despite the temporary reduction, the improvement did not last long. By February 2026, the circular debt had climbed again to Rs. 1.838 trillion, reflecting an increase of Rs. 228 billion in a relatively short period.

The report identified multiple structural issues behind the renewed rise in liabilities. Among the key reasons highlighted were growing losses in power distribution companies, unresolved legacy power purchase agreements, tariff gaps, and long-standing operational inefficiencies within the energy sector.

Energy experts believe the increase in circular debt continues to place heavy financial pressure on Pakistan’s economy and power infrastructure. The issue has remained one of the most persistent challenges for successive governments, affecting electricity supply, investor confidence, and the financial stability of energy companies.

Distribution company losses remain a major concern, particularly due to electricity theft, transmission inefficiencies, and low recovery rates in several regions. Analysts say these losses directly contribute to the accumulation of unpaid dues across the power supply chain.

The report also pointed to tariff shortfalls as another critical factor. When electricity tariffs fail to fully cover production and operational costs, the resulting gap adds to circular debt liabilities. Delays in subsidy payments and financial settlements further worsen the situation.

Pakistan’s energy sector has repeatedly undergone reforms aimed at reducing debt and improving efficiency. However, experts argue that sustainable improvement requires long-term structural changes, including modernization of distribution networks, better governance, and more efficient pricing mechanisms.

The resurgence of circular debt highlights the fragile nature of recent financial gains in the power sector. Economists warn that without comprehensive reforms, the debt burden could continue to rise and place additional strain on public finances.

The Pakistan Electricity Review 2026 suggests that tackling operational inefficiencies and improving revenue collection will remain essential for controlling future debt growth and ensuring stability in the country’s energy sector.