National Debt vs Circular Debt: What's the Difference?
Two different debts often confused in Pakistan's budget debate
By the ISN Media desk • June 2026 • Approx. 5-min read
This is a short, factual answer to a common confusion in Pakistan's economic debate. The figures are Budget Estimates from the Government of Pakistan, in billions of rupees. For the budget's interest bill, see the 43 percent; for the power-sector problem, see what is circular debt in Pakistan.
What is the difference between national debt and circular debt?
National debt is money the government itself has borrowed, and the interest on it, about Rs 8,054 billion in 2026-27, is the largest line in the budget. Circular debt is something different: it is the pile of unpaid bills that accumulates inside the power sector, between electricity producers, distributors, fuel suppliers and the government, when payments do not flow through the chain. They are two distinct problems, even though both involve large sums and both ultimately weigh on the public finances.
National debt, in brief
National debt is the total the government owes to its lenders, at home and abroad, from years of borrowing to fund deficits. Its cost shows up in the budget as interest, or mark-up, of about Rs 8,054 billion in 2026-27. About Rs 6,983 billion of that interest is on domestic debt and about Rs 1,071 billion on foreign debt. This is the debt examined in the budget's largest line.
Circular debt, in brief
Circular debt is specific to the power sector. It builds up when the amount collected from electricity consumers is less than the cost of producing and supplying that electricity, and the shortfall is not fully covered. The gap then circulates as unpaid dues: distribution companies cannot fully pay power producers, who cannot fully pay fuel suppliers, and the government steps in with subsidies and guarantees. The result is a growing stock of unpaid obligations inside the system, examined in what is circular debt in Pakistan.
How they connect to the budget
Both debts touch the budget, but differently. National debt appears directly, as the interest line. Circular debt appears indirectly, through the power-sector subsidies the government pays to hold down tariffs and manage the shortfall, part of the subsidy bill of about Rs 1,091 billion examined in subsidies, who gets the 1,091 billion. So a reader following the budget will meet national debt as interest and circular debt as subsidies, two different lines for two different problems.
Frequently asked questions
What is the difference between national debt and circular debt? National debt is money the government borrowed, and its interest is the largest budget line. Circular debt is unpaid bills accumulating inside the power sector when payments do not flow through the chain. They are distinct problems.
What is national debt? The total the government owes its lenders from years of borrowing. Its cost appears as interest, about Rs 8,054 billion in 2026-27.
What is circular debt? A build-up of unpaid dues in the power sector, arising when collections fall short of the cost of supplying electricity and the gap is not fully covered, so unpaid obligations circulate between producers, distributors, suppliers and the government.
How do they appear in the budget? National debt appears directly as the interest line. Circular debt appears indirectly through power-sector subsidies, part of the subsidy bill.
Are both problems large? Yes. National debt interest is about Rs 8,054 billion a year, and circular debt has grown into a large stock of unpaid obligations in the power sector, both weighing on the public finances.
Why are they confused? Because both are called debt, both involve very large sums, and both ultimately burden the budget, even though they arise in completely different ways.
Sources and notes
- Government of Pakistan, Federal Budget 2026-27: interest and subsidy figures are Budget Estimates in billions of rupees, rounded for readability.
- The description of circular debt reflects the standard public understanding of the power-sector payment chain.
ISN MEDIA