Circular debt in Pakistan refers to unpaid obligations that accumulate within the power sector: distribution companies fail to pay independent power producers, who in turn cannot pay fuel suppliers, causing a growing chain of debt. Over time, these liabilities burden the federal budget, reduce investor confidence, strain public finances, and inhibit the ability of power firms to operate efficiently. The unresolved circular debt has long been one of Pakistan’s most intractable energy sector problems.
Landmark Deal of Rs 1.22 Trillion Was Restructured
On September 26, 2025, Pakistan’s Finance Ministry announced it welcomed a landmark deal to resolve Rs 1.225 trillion Rs 1.22 tr in power sector circular debt. The arrangement involved working jointly across institutions the Prime Minister’s Task Force on Power, the Ministry of Energy, State Bank of Pakistan, the Pakistan Banks Association, and 18 partner banks.
Under the plan, the government restructured Rs 660 billion in existing debt and secured Rs 565 billion in fresh financing to clear overdue payments to power producers. Crucially, the deal shields consumers from new costs, as repayments will be covered through an already existing surcharge of Rs 3.23 per unit.
Why the Government Calls the Resolution a Turning Point
Officials characterized the resolution as a decisive move toward restoring fiscal discipline, investor confidence, and energy sector sustainability. They argue that by clearing old liabilities and removing uncertainty, the government unlocks much-needed liquidity most notably, Rs 660 billion in sovereign guarantees that can now flow into other sectors such as agriculture, small and medium enterprises , housing, education, and healthcare.
While the debt resolution draws applause, the success of this initiative hinges on several critical risks. First, whether power companies and fuel suppliers will comply with restructured payment schedules. If underlying losses or inefficiencies persist, the debt may resurface.
Broader Implications for Pakistan’s Economy and Energy Reform
Successfully resolving this huge chunk of circular debt could be a promising inflection point for Pakistan’s broader economic recovery. Energy is a foundational sector: when power firms are solvent and supply is reliable, industry, agriculture, and commerce benefit. The deal may ease pressure on subsidies, reduce dependence on bailouts, and open fiscal space for development spending.
It also signals to investors foreign and domestic that Pakistan is serious about tackling one of its biggest constraints. If the momentum continues, the energy sector could become less of a fiscal sinkhole and more of a sustainable contributor to growth.
