Finance Ministry Flags Circular Debt as Major Threat to Pakistan’s Fiscal Health

The Ministry of Finance has raised a red flag over Pakistan’s ballooning circular debt, which has surged to Rs4,700 billion as of December 2024 — a serious threat to the country’s financial stability. Out of this, Rs2,400 billion is tied to the power sector, and Rs2,300 billion stems from the gas sector.

According to the ministry, there's no concrete plan yet to deal with the issue, and the government doesn’t have the cash to clear it. With limited room to adjust tariffs further, the circular debt continues to drag down fiscal space. If it’s not sorted out soon, it could permanently damage the government’s ability to invest in development and force increased borrowing.

The finance ministry’s internal documents warned that failure to resolve the circular debt could lead to more subsidies, potential bailouts, or even restructuring the debt. Although the federal budget doesn't include a dedicated strategy for solving the crisis, the ministry admitted that the responsibility ultimately falls on the government.

To avoid long-term economic instability, the ministry stressed that Pakistan needs a transparent, credible, and long-term solution to control and eventually wipe out circular debt — a move that's essential for protecting the country’s financial future.