Pakistan Power Sector Still Under Pressure Despite Fresh Bank Deals
While the government is calling recent banking arrangements a major breakthrough, Pakistan’s power sector remains under intense structural pressure. The debate in early 2026 is no longer just about how big the circular debt is, but why it keeps coming back despite repeated financial fixes.
1. Circular Debt: Why the Numbers Don’t Match
Media Reports (Pressure Narrative)
Recent reports claim:
- Rs 223 billion increase in circular debt during July–November 2025
- Total stock reaching around Rs 1.837 trillion
These figures triggered alarm, especially among energy analysts.
Official Position (Power Division)
The Power Division Pakistan has rejected these claims, stating:
- Circular debt flow declined in December 2025
- Net increase for July–December 2025 was below Rs 80 billion
- Debt stock is much lower than November 2024, when it stood at Rs 2.381 trillion
The Reality
Both sides are technically correct:
- Media figures highlight early-year pressure
- Government figures rely on year-end adjustments and one-off payments
The core issue is that debt growth slows temporarily but never truly stops.
2. The Rs 1.225 Trillion Bank Deal Explained
To manage liquidity stress, the government signed a refinancing deal with 18 commercial banks.
What the Deal Does
- Replaces high-interest legacy debt of Power Holding Limited (PHL)
- Converts it into long-term, cheaper financing
Key Terms
- Total size: Rs 1.225 trillion
- Tenure: 6 years
- Repayment: 24 quarterly installments
Who Pays?
- Through the existing electricity surcharge of Rs 3.23 per unit
- The government insists:
- This is not a new tax
- It avoids an immediate tariff shock
This deal buys time, but it does not eliminate the root causes.
3. Why Circular Debt Pressure Still Exists
Despite refinancing, three structural problems keep pushing the sector back to the edge.
1️⃣ Excess Capacity & Capacity Payments
Pakistan now has:
- 45,000+ MW installed capacity
- Peak demand: rarely above 30,000 MW
Result:
- Billions paid annually to power plants that do not run
- These capacity payments are fixed and unavoidable
Consumers pay for electricity that is never produced.
2️⃣ Falling On-Grid Demand (Solar Shift)
High electricity prices have triggered:
- Rapid growth of rooftop solar
- Industrial and commercial users leaving the grid
Impact:
- DISCO revenues fall
- Fixed costs stay the same
- Burden shifts to remaining consumers
This creates a tariff death spiral.
3️⃣ International Lender Pressure
Institutions like the World Bank are demanding:
- Real reduction in line losses
- Action against theft
- DISCO performance reforms
Without this, Pakistan cannot access:
- A proposed $36 billion refinancing package
- Concessional loans at ~2% interest
4. Snapshot: Pakistan Energy Metrics (January 2026)
| Metric | Current Status |
|---|---|
| Circular Debt Stock | ~Rs 1.8 trillion |
| Target (June 2026) | Rs 1.6 trillion |
| Debt Surcharge | Rs 3.23/unit (5–6 years) |
| Industrial Relief Tariff | Rs 22.98/unit (surplus power) |
| Avg National Tariff | ~Rs 42.27/unit |
| 2024 Avg Tariff | ~Rs 53/unit |
Tariffs are lower than 2024, but still too high for growth.
5. Answering the Big Questions
What are the three main issues in Pakistan’s power sector?
- Excess capacity & capacity payments
- Distribution losses and theft
- Declining demand due to high tariffs
What is the circular debt of electricity in Pakistan?
As of January 2026, around Rs 1.8 trillion, with a government target to reduce it to Rs 1.6 trillion by June 2026.
Why does electricity go off in Pakistan?
- Grid congestion
- Maintenance issues
- Low recovery in some areas
- Fuel supply constraints
Load-shedding today is more about system stress, not absolute shortage.
What are the current challenges in the banking sector?
- Heavy exposure to government energy debt
- Refinancing risk
- Pressure from IMF-linked reforms
6. What’s Next? (Best-Case Scenario)
The government is actively seeking:
- $36 billion from the World Bank, ADB, and Saudi Arabia
If successful:
- High-interest loans replaced with 2% concessional debt
- Electricity prices could fall to:
- 8–9 US cents/unit
- Roughly Rs 25 per unit
This would be the first real structural relief in decades.
Final Verdict
The bank deal is not a solution.
It is a financial bridge.
Pakistan’s circular debt problem will only stabilize when:
- Capacity payments are renegotiated
- Distribution losses fall sharply
- Solar is integrated, not penalized
- Tariffs reflect actual demand reality
