Published in Business Recorder on Friday, 26 Sep:
By Furqan Ali – Independent Writer
Pakistan’s energy sector is once again at the edge of a precipice it has looked over far too many times before. As of March 2025, the debt had grown to nearly Rs2.4 trillion, equivalent to about 2.1% of the country’s GDP. This is not merely a technical or financial issue but a structural affliction rooted in policy inertia, political compromise, and institutional decay—driven by weak collections, theft, poor infrastructure, governance failures, and market inefficiencies.
The government’s latest attempt to tackle the power sector crisis is a historic Rs1.225 trillion syndicated bank financing arrangement (structured under Islamic finance), orchestrated by CPPA-G and endorsed by the IMF along with 18 participating commercial banks. The initiative seeks to partially settle the circular debt by addressing legacy liabilities of Power Holding Limited (PHL) facilities—including Syndicated Long-Term Financing and Pakistan Energy Sukuks I & II—amounting to approximately Rs659 billion, as well as outstanding late payment charges of IPPs. Representing the largest banking transaction in Pakistan’s history, this refinancing offers temporary relief but raises a critical question: is it merely a restructuring of debt that paves the way for further borrowing?
Unlike previous bailouts, the government’s 2025 plan is more refined, featuring a repayment structure with a tenor of up to six years and no grace period. Repayments will be made in 24 quarterly installments covering both profit and principal, with profit made quarterly in arrears at a rate of 3 month KIBOR minus 90 basis points per annum. The plan commits annually fixed cash flow of PKR 310 billion over six years, or until full repayment of the Facility/Instrument, whichever is earlier. In an environment of high risk and uncertain returns, banks have demonstrated a willingness to shoulder exposure to the beleaguered power sector.
This reflects not just regulatory coordination through the Pakistan Banks Association (PBA) but also a broader institutional commitment to stabilizing the macroeconomic environment. The Debt Service Surcharge (DSS), already part of electricity bills, has been ring-fenced to service this borrowing, ensuring no immediate additional burden on consumers. But while the transaction’s scale and structure are unprecedented, the history of the circular debt issue warns us not to mistake financial engineering for fundamental reform.
Recall 2013, when the PML-N government paid Rs480 billion to retire the circular debt. It resurfaced within months. What followed were years of stopgap tariff hikes, ad hoc subsidies, and repeated appeals to the IMF. This pattern of fiscal firefighting failed to address the underlying rot exorbitant generation costs, inefficient transmission and distribution networks, non-payment by government entities, and a broken subsidy regime.
The cost of these inefficiencies has been staggering. Tariffs have risen nearly sevenfold since 2007. Still, the power sector constitutes a major share of the government’s Rs4.6 trillion in accumulated liabilities, reflecting the deep financial stress. In the FY2026 budget, subsidies remain heavily concentrated in the sector, comprising around 90% of the total, Rs 1 trillion out of Rs1.2 trillion. Worse still, consumers continue to pay for idle\ capacity. Capacity payments have increased from Rs7/unit in FY20 to about Rs17.5/unit in FY25, making grid electricity 87-140% pricier than in neighbouring countries, while only around 34% of installed capacity is being utilised.
What differentiates the 2025 plan from its predecessors is the tentative commitment to structural reform. There is movement toward privatising six electricity distribution companies (DISCOs), starting with IESCO, GEPCO, and FESCO. The financial performance of DISCOs, at least in headline terms, has improved: inefficiency losses fell from Rs591 billion in FY24 to Rs400 billion in FY25, while recovery rates rose from 92.4% to 96.6%.
However, these gains must be viewed with caution. Much of the improvement in the latter half of FY25 appears statistical, driven by billing anomalies and collection pushbacks rather than genuine operational change. For instance, the second half of FY25 recorded over 100% recovery. Meanwhile, T&D losses remain entrenched at around 18%, well above NEPRA’s benchmark of 11.4%, and meaningful digital reforms or anti-theft campaigns are still at an early stage.
More crucially, the current conversation remains overly supply-focused. Pakistan has over 45,000 MW in installed capacity, but peak demand rarely exceeds 30,000 MW. Capacity payments to idle plants have ballooned to Rs1.9 trillion annually. The emphasis has long been on reducing generation costs or switching to local fuels. These are necessary goals, but they are insufficient. What’s missing is a comprehensive demand-side strategy. Industrial consumption remains stagnant at 26.3%, while households consume nearly half the electricity, mostly through inefficient appliances. Agriculture and commerce barely register.
Another issue is the PV boom, which is eroding grid demand and driving up per-unit electricity costs. Solar now accounts for over 25% of utility supplied electricity, placing Pakistan among fewer than 20 countries to cross this threshold. Between FY19 and FY24, Pakistan imported 27.6 GW of solar PV modules, with an additional 5.2 GW brought in during the first half of FY25. This surge has created a “noon demand hole,” producing a pronounced duck curve. Without a shift in demand structure—towards industrial and transport electrification as well as heating—the sector will remain misaligned with Pakistan’s economic and climate priorities.
A truly “debtless” future must therefore go beyond balancing books. It demands rethinking the very purpose and design of the power sector. That includes reforming the Indicative Generation Capacity Expansion Plan (IGCEP), which still relies on outdated metrics like Levelized Cost of Electricity (LCOE). LCOE ignores when, where, and how electricity is produced, misaligning generation planning with real-time demand and grid realities. It also means embracing new load sources: electric motorcycles in urban centers, grid-fed industrial plants, electric cooking and heating in homes, and data centers that can absorb surplus capacity.
Restructuring must also extend to planning frameworks. Integrated System Planning (ISP) now links generation (IGCEP) with transmission (TSEP) to correct past siloed approaches. Integrated Resource Planning (IRP) goes further by incorporating fuel, distribution, and demand-side measures. But Pakistan ultimately needs Integrated Economic Planning (IEP), which aligns power planning with demand creation and national development. None of this can be achieved through policy declarations alone. It requires infrastructure investments, tariff restructuring, and financing models tailored to evolving consumption patterns.
The debt burden can only be managed if the sector becomes productive, not parasitic. If reforms hold, and if interest rates continue to fall, the repayment horizon of six years could be met, freeing up bank balance sheets and creating lending space for small businesses, agriculture, and renewables. Here, the banking sector has played a constructive and necessary role, that is, absorbing near-term risk to enable long-term fiscal and sectoral sustainability. Their cooperation in the refinancing plan offers a rare example of institutional alignment in the service of economic reform.
But that “if” looms large. Implementation is everything. Without sustained governance reform, transparent subsidy targeting, timely tariff adjustments, and depoliticized sector oversight, even the most generous refinancing will falter. As past attempts have shown, there is no shortcut to structural integrity. In the end, the question is not whether the sector can be debtless, but whether the political economy can stomach the disruption that true reform demands. The answer lies not in the next loan or surcharge, but in the institutions and incentives we are willing—or unwilling—to change.