ISLAMABAD: The National Assembly Standing Committee on Finance was informed on Tuesday that Pakistan’s total circular debt on electricity and gas has climbed to Rs5,100 billion, up sharply from Rs3,500 billion recorded in the previous year.

The briefing came during a detailed review of the country’s economic situation and financial priorities for the upcoming fiscal year 2026-27. Committee members examined emerging risks, performance under the IMF programme, and the pace of structural reforms.

Officials told the committee that despite gradual signs of economic recovery, Pakistan remains on a path of “fragile stability.” The presentation highlighted both positive indicators and persistent vulnerabilities in the macroeconomic framework.

External debt of the country stands at $137.56 billion, according to the data shared with lawmakers. This figure continues to weigh on fiscal space as debt servicing obligations grow.

For fiscal year 2026-27, the government is projecting GDP growth between 3.5 percent and 4.5 percent. However, inflation has re-entered double digits, reaching 10.9 percent year-on-year in April 2026.

The committee expressed serious reservations over the continued heavy reliance on indirect taxes and petroleum levy instead of broadening the tax base. Chairman of the committee highlighted multiple pressure points including the rising burden of circular debt, slow reforms in public sector entities, inflation, unemployment, and poverty-driven social strain.

**Circular Debt Breakdown** Power sector circular debt forms the bulk of the Rs5.1 trillion total, driven by persistent gaps between tariffs and actual costs, transmission losses, and delayed payments from distribution companies to producers. Gas sector circular debt has also grown due to similar structural issues in pricing and supply chain inefficiencies.

According to official estimates, the year-on-year increase of Rs1.6 trillion in circular debt reflects both accumulated unpaid dues and new additions during the current fiscal year. This stock now equals roughly 6-7 percent of Pakistan’s projected GDP.

**Fiscal Review for FY2026-27** The Standing Committee reviewed key macroeconomic targets for the next budget. Besides GDP growth projections, officials discussed plans to contain fiscal deficit, expected revenue targets, and development spending priorities.

Inflationary pressures remain a key concern. After moderating in late 2025, headline inflation spiked again in early 2026 due to energy price adjustments, exchange rate movements, and rising food costs.

The IMF programme implementation was also reviewed. Progress on structural benchmarks, particularly energy sector reforms and tax administration improvements, came under scrutiny during the meeting.

**Official Concerns** Committee Chairman stressed that mounting circular debt is crowding out development spending and increasing the risk of further tariff hikes that could fuel inflation. He called for accelerated reforms in state-owned enterprises to reduce the burden on the national exchequer.

Lawmakers raised questions about the effectiveness of current policies in expanding the tax net. Reliance on indirect taxation and frequent petroleum levy increases has drawn criticism for disproportionately affecting lower-income groups.

**Economic Background** Pakistan has struggled with circular debt for over a decade. Successive governments have announced multiple plans to clear the stock, but structural issues including theft, inefficiencies, and political reluctance to pass on full costs have allowed the problem to grow.

The external debt position reflects both long-term project loans and short-term borrowing used to support balance of payments. Debt servicing continues to consume a significant portion of government revenues, limiting fiscal flexibility.

**Market and Public Impact** Rising energy costs linked to circular debt management have affected industrial competitiveness and household budgets. Many businesses report higher operational costs, while consumers face frequent adjustments in electricity and gas bills.

Inflation at 10.9 percent has eroded purchasing power, particularly in urban and semi-urban areas. Combined with slow job creation, this has heightened social pressures.

**Strategic Implications** The committee noted that without meaningful reforms in energy pricing, tax collection, and governance of public entities, the debt spiral risks undermining broader economic stability. Achieving sustainable GDP growth above 5 percent will require resolving these structural bottlenecks.

Future fiscal strategy is likely to focus on a mix of revenue enhancement, expenditure rationalisation, and targeted subsidies for vulnerable segments. However, the pace of implementation remains critical given external vulnerabilities including global commodity prices and exchange rate fluctuations.

Analysts suggest that successful completion of the current IMF programme and effective follow-up measures could help anchor market confidence and ease financing pressures in the coming years. Yet, the growing circular debt stock serves as a reminder of unfinished reforms in the energy sector.

The Standing Committee is expected to continue deliberations on these issues in upcoming sessions as the government prepares to present the federal budget for 2026-27.