SOEs' debt soars to Rs10.1 trillion

Finance ministry report says debt Rs7.1tr higher than State Bank figures

ISLAMABAD:

The debt level of state-owned companies jumped to a record Rs10.1 trillion by the end of December 2025, higher by 242% than the central bank statistics, which raises questions about governance reforms.

The finance ministry disclosed that the per-working-day loss of SOEs increased to Rs2.8 billion (Rs730 billion annually) and the per-day financial support swelled to Rs6.6 billion (Rs1.7 trillion per year). At the given per-day losses and fiscal support, the cumulative annual impact comes to Rs2.5 trillion, which is Rs1.5 trillion more than this fiscal year's federal development budget.

These figures were disclosed by the Ministry of Finance on Monday in an excellent analytical report on SOE monitoring for July-December 2025, which stated "financial engineering and debt re-profiling measures alone remain insufficient" to address the circular debt problem in the power sector. The findings negate the claims made by the federal government, the IMF and the World Bank about improvements in the SOE affairs, particularly the reduction in the circular debt stock and flow.

According to the Central Monitoring Unit (CMU) of the finance ministry, the total debt of SOEs jumped to Rs10.1 trillion as of end-December, an increase of Rs1.3 trillion, or 14.3%, over the same period of the preceding year. The total debt the CMU reported was Rs7.1 trillion, or 242%, higher than the total public debt and liabilities of SOEs reported by the State Bank of Pakistan. The SBP bulletin put the debt and liabilities of SOEs at Rs2.95 trillion till December last year.

The broader SOE balance sheet remains highly leveraged, with debt exposure exceeding Rs10 trillion, including Rs2.6 trillion in foreign currency-denominated liabilities, said the CMU. The publication of the report was delayed for a while and it came just two days before the end of IMF talks.

The CMU said the Rs2.6 trillion foreign liabilities of SOEs were "exposing the sovereign to elevated exchange rate pass-through risk, refinancing pressure, imported inflation sensitivity and external account volatility". The report showed the government gave Rs2.1 trillion in cash development loans to SOEs as of December last year, higher by Rs416 billion, or 25%, in a year. Likewise, there was a 40% hike in foreign loans, which jumped to Rs2.6 trillion.

The report stated that banks also gave Rs3.1 trillion in loans to SOEs and the cost of unfunded pension liabilities was Rs2 trillion, up 11%. "The aggregate loss profile of loss-making SOEs is estimated at Rs2.8 billion on a per-working-day basis, while fiscal support through subsidies, grants, loans and equity injections reached nearly Rs6.6 billion per day, equivalent to 11% of total federal budgetary receipts."

Concurrently, the CMU stated that Pakistan's combined circular debt escalated to Rs3.3 trillion and despite restructuring initiatives and the partial warehousing of liabilities through Central Power Purchasing Agency-linked financing arrangements, serviced via the Debt Servicing Surcharge (DSS), the stock still increased within the six-month period.

"This deterioration demonstrates that financial engineering and debt re-profiling measures alone remain insufficient in the absence of deep-rooted operational reforms across generation, transmission, distribution, tariff rationalisation, governance enforcement, theft control and recovery mechanisms," said the finance ministry.

The report stated that additional fiscal fragilities arise from sovereign guarantees exceeding Rs2.1 trillion and unfunded pension liabilities approaching Rs1.9 trillion, both of which represent latent contingent obligations capable of crystallising into direct federal liabilities under stressed macroeconomic conditions.

The CMU said the anticipated IFRS 9 Expected Credit Loss (ECL) provisioning requirements within the oil & gas sector could trigger incremental provisioning shocks approaching Rs500 billion, materially impairing profitability, retained earnings, dividend flows to the government and overall market capitalisation within one of the few currently profitable segments of the portfolio.

The report commented on performance of the power sector that was on the decline. Losses relating to DISCOs were primarily attributable to technical losses exceeding Nepra benchmarks, persistent under-recoveries and continuing circular debt accumulation arising from operational inefficiencies.

The circular-debt flow attributable to DISCO inefficiencies amounted to Rs112 billion, while under-recoveries contributed an additional Rs31 billion during the six-month period. Notably, despite broader restructuring initiatives, the underlying circular debt flow continued to rise to Rs374 billion on a gross basis over the first half of 2026 fiscal year as per Power Division's numbers.

The CMU said that overall the loss profile of the SOE sector continued to remain concentrated in structurally weak infrastructure and energy entities, particularly within the power distribution segment, where inefficiencies, technical losses and tariff distortions continued to transmit significant fiscal pressure onto the sovereign balance sheet.

The most pronounced increase was recorded in equity injections during the first half of last fiscal year, which surged by 190% to Rs225 billion. These injections were primarily one-off in nature and directed largely towards clearing power-sector circular debt obligations through payments to Independent Power Producers (IPPs). However, despite these interventions, the circular debt stock continued to accumulate, increasing by Rs143 billion during the six-month period, it added.

To improve fiscal transparency and mitigate the accumulation of unaccounted-for subsidy payables, the implementation of structured Public Service Obligation (PSO) frameworks supported by accurate and verifiable costing methodologies is recommended across applicable SOEs, according to CMU.

It said that Pakistan's SOE portfolio represented a material and increasingly systemic macro-fiscal vulnerability, characterised by excessive dependence on a narrow subset of profitable entities within the oil and financial sectors, while a substantial portion of the broader portfolio remained structurally loss-making and fiscally dependent.

Profitability within the oil sector itself remains materially exposed to international commodity price volatility and limited portfolio-level hedging mechanisms, thereby increasing earnings sensitivity and dividend instability during adverse pricing cycles. Accordingly, the portfolio exhibits elevated concentration risk, whereby a limited group of profitable SOEs effectively subsidises broader systemic inefficiencies across the federal SOE landscape.