Mehmood ul Hasan Qadir — Economist & Financial Analyst | Dubai, UAE

The Pakistan Ledger | Opinion

Pakistan’s power sector circular debt is not a financial problem with a financial solution. It is a political problem with political causes, sustained by political choices, and solvable only through political courage that every government since 2008 has, at the decisive moment, declined to exercise. The circular debt — the accumulating payment obligation gap between what the power sector costs and what it collects — crossed Rs. 2.6 trillion in 2023. At current trajectory, without structural intervention, it will exceed Rs. 4 trillion before the end of this decade. This is not a footnote to Pakistan’s energy crisis. It is the engine of it.

What the NEPRA State of Industry Report Actually Says

NEPRA’s State of Industry Report — published annually and consistently underread by everyone except the technocrats and financiers who must deal with its consequences — documents the anatomy of the circular debt with forensic precision. The gap between the cost of power generation and the revenue collected is driven by four simultaneous failure points: transmission and distribution losses that NEPRA benchmarks at 17–18% but which in practice run at 18–22% across the distribution company network; recovery rates by DISCOs that average around 85–90% of billing but mask extreme underperformance in specific regions and consumer categories; capacity payments to Independent Power Producers that must be paid regardless of how much electricity is actually dispatched; and subsidies that are not fully reimbursed by the government to the power sector on time, creating a cascading payment default chain.

Capacity Payments — Paying for Power Nobody Uses

The most structurally damaging component of the circular debt is the capacity payment obligation. Under the terms of Pakistan’s Independent Power Producer agreements — negotiated across multiple governments from the 1990s onwards — Pakistan is obligated to pay a fixed capacity charge to IPPs for every megawatt of installed capacity, regardless of whether that capacity is actually dispatched to the grid. As Pakistan’s installed generation capacity grew — driven by the energy crisis of the early 2010s and subsequently by CPEC power projects — the capacity payment obligation grew with it.

Pakistan now has installed generation capacity significantly in excess of its peak demand, with capacity utilisation rates during off-peak periods that make the fixed payment-to-dispatch ratio economically indefensible. The government pays billions of rupees monthly to power plants that are sitting idle, because the contracts — signed with sovereign guarantees — require it. The renegotiation of these contracts, undertaken intermittently under IMF programme pressure, has produced partial results. It has not produced the comprehensive restructuring that the arithmetic of the circular debt demands.

T&D Losses — The Theft Economy in Plain Sight

Transmission and distribution losses in Pakistan’s power network include both technical losses — inherent in the physics of electricity transmission across ageing infrastructure — and non-technical losses, which is the official euphemism for electricity theft. Non-technical losses are concentrated in specific geographic areas, specific consumer categories, and specific DISCO service territories. They are not a secret. The utilities know where the losses are, the regulators know where the losses are, and the political elite that benefits from or turns a blind eye to them knows where they are.

Bringing Pakistan’s distribution losses to regional benchmark levels of 12–14% — from the current 18–22% — would recover enough revenue to make a material dent in the annual circular debt increment. The technology to do this — smart metering, automated meter reading, aerial bundled cable to prevent hook connections — exists and is deployed in comparable utilities globally. The will to deploy it in Pakistan has consistently been overridden by the political economy of electricity theft tolerance in areas where disconnection would cost votes.

The Solution Nobody Wants to Implement

Every energy sector reform document produced for Pakistan over the past fifteen years contains the same recommendations: cost-reflective tariffs, DISCO privatisation or corporatisation with performance accountability, smart meter rollout, IPP contract renegotiation, reduction of cross-subsidies between consumer categories, and governance reform at NEPRA and the power ministry. These recommendations are not wrong. They have not been implemented because implementing them means raising electricity prices to the level that reflects actual costs, reducing electricity theft in politically sensitive constituencies, and confronting the IPP lobby that has benefited from capacity payment contracts.

The circular debt is an economic cancer because it metastasises. Every year it grows, it crowds out development spending, increases sovereign debt obligations, degrades the balance sheets of state-owned banks that are forced to finance it, and ensures that Pakistan’s industrial electricity costs remain among the highest in the region — directly undermining the manufacturing competitiveness argument. The government that finally acts on this comprehensively will face significant short-term political pain. The governments that continue to avoid it are creating long-term economic catastrophe. The mathematics are unambiguous. The political will remains the variable.

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Mehmood ul Hasan Qadir is an Economist and Financial Analyst based in Dubai, UAE. He writes on Pakistan’s economic structure, policy failures, and reform pathways for The Pakistan Ledger.