Pakistan plans to eliminate circular debt by fiscal year 2030-31

The Pakistani government aims to eliminate the country’s circular debt by fiscal year 2030-31 through a combination of measures including renegotiations with independent power producers (IPPs), timely price adjustments, cash injections, and debt transfers to holding companies.

According to a document from the International Monetary Fund (IMF), the circular debt stock stood at PKR 2.4 trillion — or 2.1% of GDP — by the end of FY25. Of this, PKR 348 billion will be cleared through renegotiated arrears with IPPs. This includes PKR 127 billion earmarked as a budgeted subsidy, and PKR 221 billion through Central Power Purchasing Agency (CPPA) cash flows.

An additional PKR 387 billion will be written off through waived interest fees, and PKR 254 billion will come from other budgeted subsidies for circular debt clearance. Meanwhile, PKR 224 billion in non-interest-bearing liabilities will remain uncleared.

To settle the remaining PKR 1.252 trillion, the government plans to borrow from commercial banks. This includes PKR 683 billion to repay all loans taken through the Power Holding Limited (PHL) and PKR 569 billion to clear remaining interest-bearing arrears to power producers. These loans will be acquired at a rate more favorable than what is currently paid on the circular debt stock — a major contributor to ongoing debt accumulation.

Annual repayments will be financed through the Debt Service Surcharge (DSS), which will be set at 10% of NEPRA’s determined revenue requirement and adjusted annually during rebasing. If DSS revenues fall short, the surcharge will be increased to make up for the deficit and anticipate future gaps. To facilitate this, the government plans to introduce legislation to remove the 10% DSS cap by the end of June 2025.

No fiscal resources will be used to cover revenue shortfalls. Additionally, a plan to retire the remaining interest-bearing circular debt stock — projected to be no more than PKR 337 billion by the end of FY25 — will be formulated as part of the FY26 budget process without using subsidies.

With interest charges on delayed payments to IPPs significantly reduced, circular debt targets have been revised downward and are expected to reach zero by FY31, the conclusion of the plan.

The flow of circular debt showed strong performance during September and December. From the end of June through February 2025, the debt rose by PKR 166 billion — well below the March indicative target of PKR 554 billion. By the end of February, the total stock stood at PKR 2.53 trillion, or 2.2% of GDP.

The improvement was attributed to strong collections, reduced interest rates, and timely intra-year tariff adjustments, which helped offset higher-than-expected system losses and enabled a reduction in electricity tariffs of roughly PKR 5 per kilowatt-hour between July 2024 and March 2025.