In February 2025, Pakistan’s electricity generation dropped by 15% to 6,945 GWh as the circular debt of the country stood at PKR 2.9 trillion. The energy crisis has been one of the most prevalent issues in Pakistan for the past few decades. This has exacerbated the economic crisis in the country. Energy shortages and high tariffs directly impact industrial growth, which in turn affects the country’s economy. To avoid slipping into default, the country then has to rely on IMF bailouts. As of March 2025, the total outstanding credit of Pakistan with the IMF stands at 6.33 billion Special Drawing Rights (SDRs). So, how can Pakistan mitigate the crisis its energy sector is facing to overcome the barrier it creates to economic development?
A Brief Overview of the Energy Problem
While there are multiple drivers of Pakistan’s energy predicament, circular debt stands out as the major factor. There are four major players in the energy sector of Pakistan: the government and regulators, power generation companies, national transmission and distribution companies, and consumers. When one of these entities fails to make payments to another, a pile of unpaid bills accumulates. This is what is known as circular debt. Another major reason for Pakistan’s energy crisis is its overdependence on imported fuels. Around 70% of Pakistan’s energy requirements are fulfilled using imports. FY 2023-2024 witnessed a staggering USD 17 billion energy import bill. The import bill is paid in dollars, which drains the country’s foreign reserves.
One of the other major issues with the energy sector is poor governance. Important decision-making positions in entities such as DISCOS are held by people lacking the technical background to understand and resolve energy-related issues. These DISCOS in particular suffer from inefficiencies. According to NEPRA, around PKR 281 billion is lost annually due to the illegal tapping of electricity. Moreover, due to overloaded and outdated grid infrastructure, only about 28,000 MW of electricity is transmitted, even though the installed power generation capacity is around 49,270 MW.
Another hurdle in resolving the energy crisis is the lack of consensus regarding what actually is the root cause of the problem. For some policymakers, the core problem is fiscal limitations, while for others it is energy imports. Consequently, there is a lack of a long-term consistent strategy to address the energy crisis. The energy policy shifts with every new government.
A Crisis for the Industries
Industry is the backbone of the economy, and in order to run, it requires an uninterrupted supply of energy. Pakistan’s textile sector, for example, makes up 60% of its total exports and employs 40% of the industrial workforce. However, due to the energy crisis, the sector faces regular disruptions. The All Pakistan Textile Mills Association (APTMA) revealed that textile exports declined by USD 2.8 billion (15%) in FY 2023-2024. According to various sources, over 50% of industrial units were forced to halt operations by mid-2024 as a result of the energy crisis. This, coupled with the energy import bill, has caused a surge in the fiscal deficit of the country, which stood at a staggering 7.7% of the country’s GDP in FY 2023-2024.
Moreover, industrial shutdowns have pushed around 700,000 people into unemployment. This also deters FDI, which is a significant contributor to a country’s economic development. In February 2025, Pakistan’s year-on-year FDI plummeted by 45%, standing at USD 95 million as compared to USD 172 million in February 2024.
All in all, the energy crisis leads to an economic shortfall that compels the country to seek IMF bailouts repeatedly. It is pertinent to mention here that while IMF loans provide the country with acute economic stability, they demand challenging reforms. For the energy sector, it implies cost-side reforms, which, needless to say, are fiscally prudent but require parallel efforts for energy efficiency.
Recommendations
Energy efficiency does not imply that the government spends around 10% of its GDP on the energy sector. What it implies instead is that the entire energy sector needs restructuring to make sure that issues such as poor governance and lack of consensus are resolved to devise a long-term and consistent strategy that stays in place even while governments change. The underperforming DISCOs need to be privatized through performance-based contracts, and government institutions must be made to pay their bills on time.
IPP contracts should also be renegotiated so that the country only pays for the power it consumes. Subsidies need to be reassessed to make sure they do not become an unbearable burden on the economy. A dedicated plan is needed to deal with energy thieves and to modernize energy infrastructure. For industries, captive power plants and wheeling charges models must be introduced. There is also a need to overcome the overreliance on energy imports. In essence, a range of long-term policies must be formulated and implemented to reform the energy sector of Pakistan. By addressing the issues faced by this key sector, the country can overcome its economic challenges.
If you want to submit your articles and/or research papers, please visit the Submissions page.
To stay updated with the latest jobs, CSS news, internships, scholarships, and current affairs articles, join our Community Forum!
The views and opinions expressed in this article/paper are the author’s own and do not necessarily reflect the editorial position of Paradigm Shift.
Imama Khan is a Research Assistant at Centre for Aerospace and Security Studies, Lahore. She can be reached at [email protected].