A government blame game over Pakistan's ballooning power sector circular debt has erupted, with the Power Division pointing fingers at the Ministry of Finance for a Rs61 billion increase. The debt reached Rs1.675 trillion by June 30, 2026, up from Rs1.614 trillion a year earlier, according to a statement from the division. Main Developments The Power Division attributed the Rs61 billion rise to a Rs98 billion deduction from the power sector's budget allocation for fiscal year 2026. Initially, Rs893 billion was allocated, but the cut reduced effective subsidies to Rs795 billion under an austerity policy. Excluding K-Electric, the circular debt stock stood at Rs1.675 trillion at fiscal year-end. The division stated it did not release the end-year financial report, which awaits regulatory and statutory approval. Read also: Why Pakistan's tax net expansion now targets small shopkeepers Background Pakistan's circular debt had previously declined from Rs2.393 trillion in FY24 to Rs1.614 trillion in FY25, driven by reforms. The Power Division highlighted that distribution company losses fell from Rs591 billion in FY24 to Rs397 billion in FY25, then further to Rs326 billion in the current fiscal year. Under the International Monetary Fund program, the government committed to no increase in circular debt flow and a gradual reduction in stock. The end-December 2025 target was met and appreciated by the IMF. Why It Matters The circular debt increase threatens Pakistan's compliance with IMF conditions, potentially affecting future bailout tranches. It also undermines consumer confidence in the power sector's financial sustainability, despite claims of reform progress. The Power Division argued the budget deduction is a temporary financial factor, not an operational decline. It insisted that reforms are proving effective, citing the Rs265 billion reduction in distribution losses over two years. What's Next The Power Division says it remains committed to its reform agenda for a financially sustainable energy sector. However, the unresolved blame game with the finance ministry raises questions about future budget allocations and austerity measures. Regulatory approval of the end-year financial report is pending, which could provide further clarity on the debt's trajectory. The IMF's response to the missed circular debt target will be closely watched.