KARACHI: Circular debt is the phrase Pakistanis hear whenever electricity is discussed, usually attached to a number so large it has stopped meaning anything. Strip away the headline total and it is a simple, almost homely problem: in the power sector, almost nobody pays anybody in full or on time, and the unpaid bills chase each other in a circle. Consumers underpay distributors; distributors underpay the central purchaser; the purchaser underpays generators; generators underpay fuel suppliers; fuel suppliers underpay refineries and ports — and at several points the government, which promised to cover the gaps, underpays too. The accumulated stock of these arrears is the circular debt, and until the flow of new shortfalls is fixed, paying off the stock is like emptying a bath with the tap still running. This guide walks the loop step by step, explains where the leaks are, and shows why the problem lands on the budgets of households, the profits of listed energy companies and the credit rating of the country itself. No current total is stated as fact — the stock is reported periodically by the government and the regulator; check the Ministry of Energy and NEPRA publications for the latest official figure.
The chain: following one unpaid bill around the circle
Start at the wall socket. A household or factory consumes electricity supplied by a distribution company, a DISCO. The consumer's bill is set by a tariff determined through the regulator, NEPRA, and notified by the government — two numbers that are often not the same, because governments routinely notify a lower tariff than the regulator's determination for political reasons, promising to pay the difference as a tariff differential subsidy. If that subsidy is budgeted late or in part, the DISCO has already sold electricity below its recognised cost and the shortfall is born. Add the consumers who simply do not pay — through theft, tampered meters, disputed bills or organised non-payment in some service areas — and the DISCO collects materially less than the value of the electricity it delivered. Technical and commercial losses above the level NEPRA allows are likewise disallowed: the DISCO is told, in effect, that it should have collected more, and the gap stays in the system as arrears rather than being recognised in tariffs.
The DISCO, short of cash, pays the Central Power Purchasing Agency (CPPA) — the market operator that buys power from generators on behalf of distributors — less than it owes. The CPPA, short in turn, pays the generation companies less than their invoices. Generators have two kinds of invoices, and the distinction is crucial: energy payments cover the fuel actually burned to produce electricity delivered, while capacity payments are owed for keeping plant available, whether or not it runs — the price of having contracted enough generation to meet peak demand, explained in our sector guide to PSX power generation stocks. Capacity obligations do not pause when cash is short. Independent power producers, many of them listed or owned by listed groups, therefore accumulate large receivables from the state system — money earned on paper, reported in accounts, but not received — while still having to service their own bank loans and pay their fuel suppliers.
At the far end of the chain, generators underpay the fuel world: Pakistan State Oil and other suppliers for furnace oil and diesel in earlier years, gas companies for pipeline gas, and importers and suppliers of re-gasified liquefied natural gas (RLNG). State-owned gas utilities and oil companies accumulate their own receivables, which is why circular debt is often described more broadly as energy-sector circular debt, spilling beyond electricity into gas — where a parallel loop of under-recoveries, unaccounted-for gas and cross-subsidies has built its own stock of arrears. The circle closes when the government periodically intervenes: raising money through bonds or loans parked in a holding company, or paying arrears from the budget, clearing the chain temporarily — and because the underlying flows were not fixed, the arrears begin rebuilding immediately. That pattern — clearance, rebuild, clearance — has repeated for well over a decade and is extensively documented in official and IMF reporting.
Where the leaks are: the four sources of the flow
Economists separate the stock of circular debt from the flow — the rate at which new arrears are added — and insist the flow is what matters. It has four main sources. The first is the tariff gap: notified consumer tariffs below the full cost of supply, whether through delayed fuel-price adjustments, politically frozen base tariffs, or subsidy promises not fully funded. Electricity costs move with global fuel prices and the exchange rate — a depreciation raises the rupee cost of imported fuel and of dollar-denominated capacity contracts mechanically — while tariffs move by notification, in steps, late. Every month of delay is a month of new circular debt.
The second source is losses and non-recovery in distribution. Electricity is lost technically in wires and transformers and commercially through theft; bills are issued and not collected, with recovery weakest in specific high-loss DISCOs. Because NEPRA allows only a benchmark level of losses in the tariff, everything above it is a cash hole in the chain. The third source is capacity overhang: Pakistan contracted generation aggressively in the 2010s to end load-shedding, succeeding in adding capacity but also committing to capacity payments for plants that a slowing economy does not always need — fixed dollar-linked bills arriving regardless of demand, denominated in a currency that depreciates. The fourth is interest and late-payment surcharges: arrears themselves bear financing costs, as generators charge delayed-payment mark-up and the holding-company loans raised to clear past arrears accumulate interest, so part of each year's flow is simply the cost of previous years' unpaid bills compounding — the same arithmetic as any household debt spiral.
Put the flow in illustrative numbers — invented, round, and for mechanism only. Imagine a power system whose full monthly cost is Rs 100 billion. Tariffs as notified recover Rs 92 billion of recognised cost. Of bills issued, 94 percent is actually collected, so cash in is roughly Rs 86 billion. The monthly shortfall — about Rs 14 billion — must be borrowed, delayed or parked: that is the flow, roughly Rs 170 billion a year if nothing changes, before late-payment charges. A government can settle the accumulated stock in one dramatic payment and change none of this arithmetic; the stock will be back within a few years. This is why IMF documents and serious analysis always ask about the flow first — the circular debt management plan agreed in programmes is essentially a commitment to shrink that monthly gap towards zero.
Why governments keep choosing the loop over the fix
If the causes are so well mapped, why does the loop persist? Because every genuine fix sends a bill to someone organised and vocal, while the loop sends its bill to everyone, diffusely, later. Raising tariffs to cost-reflective levels is immediately visible to households and industry already strained by inflation — the politics of subsidies in Pakistan in its purest form. Enforcing payment and disconnecting defaulters in high-theft areas confronts local power structures and courts. Renegotiating capacity contracts with generators and their foreign lenders and sponsors risks investment disputes and the country's reputation with the very financiers external financing depends on. Privatising or concessioning the worst DISCOs — the agenda in privatisation in Pakistan explained — forces all of these fights at once. The loop, by contrast, is quiet: arrears accumulate off the front page, the financing is arranged through state banks and holding companies, and the cost surfaces slowly as higher tariffs later, interest in the budget, and underinvestment everywhere. Circular debt is, in this sense, a political technology for postponing prices — which is precisely why it grows.
There is also genuine complexity beneath the politics. Tariffs must protect lifeline consumers who use very little electricity — Pakistan's tariff design uses consumption slabs with cross-subsidies between user categories — and industry argues, with reason, that expensive unreliable power destroys the exports the country needs to earn dollars, as Pakistan's exports explained details. Gas and electricity pricing interact: cheap gas diverted to inefficient uses starves efficient generation, and pricing reforms in one fuel ripple into the other. The energy mix itself — the shares of RLNG, coal, hydro, nuclear and renewables — sets the underlying cost curve the tariff must recover, which is why Pakistan's energy mix explained belongs on the same reading list.
How clearances work — and why they are not solutions
Periodically, the government "settles" circular debt in a large operation: a holding company established for the purpose borrows from a consortium of banks, or sukuk are issued, and the proceeds are paid down the chain — to generators, fuel suppliers and gas companies — wiping the recognised arrears to near zero on a chosen date. The operations are real and they matter to the companies receiving cash, but notice what actually happened in accounting terms: informal, scattered arrears owed by one part of the state system were converted into formal, interest-bearing debt owed by another part. The total obligations of the public sector did not fall; in fact they rose by the financing costs. What improved was liquidity and honesty of recognition; what did not change, unless the flow was fixed at the same time, was next month's shortfall. This is why market reactions to clearance announcements have grown more discerning over the years: the first question analysts now ask is not the size of the settlement but the size of the ongoing monthly addition it leaves behind, and whether tariff notifications, loss reduction and recovery targets are being met in the quarters that follow. NEPRA's and the Power Division's periodic circular debt reports are where that follow-through can be checked.
What circular debt does to investors and households
For listed energy companies, circular debt is the difference between profit and cash. Generators and fuel suppliers can report healthy earnings while their balance sheets swell with receivables from the state system; dividends depend on actual collections, which is why power and energy stocks often jump on news of an arrears clearance — a payment converts paper profit into spendable cash in one stroke, and companies such as the large generators discussed in how Hubco makes money disclose their receivables position for exactly this reason. Reading an energy company's accounts without checking the receivables and their ageing is reading half the story. Conversely, every clearance funded by fresh government borrowing adds to public debt and to the interest bill in the federal budget — the loop's costs never vanish, they migrate.
For households and businesses outside the sector, the loop arrives as some combination of higher tariffs later, load-shedding when fuel cannot be procured for non-payment, taxes to fund clearances, and the macroeconomic drag of a permanently stressed energy sector on growth and the currency. For the sovereign, it is a contingent liability that rating agencies and the IMF count alongside formal debt. In short, circular debt is not an electricity-industry curiosity; it is one of the main transmission lines between Pakistan's energy choices and its fiscal and currency stability.
The realistic reform menu is known and unglamorous: notify tariffs on time and in full while protecting small consumers through targeted subsidies rather than universal cheap prices; measure and publish DISCO-level losses and recoveries and hold managements to them; enforce disconnection and prosecution for theft at scale; shift new generation procurement to the cheapest sources, increasingly renewables, and avoid new fixed capacity commitments beyond need; settle fuel and gas pricing on consistent principles; and change DISCO governance, by concession, privatisation or genuine autonomy. Progress is usually tracked in programme documents and NEPRA's state-of-industry reports — the sources to check for the current stock, flow and reform status.
This article is educational content, not financial advice, and it deliberately states no current circular debt total or tariff level as fact; both are published officially and change over time, so consult the Ministry of Energy, NEPRA and the SBP for current figures.
Key takeaway: circular debt is a chain of unpaid bills created when tariffs, losses and theft leave the power system collecting less than its costs — governments can repeatedly pay off the accumulated stock, but only closing the monthly flow gap stops it growing back.
