ISLAMABAD: The International Monetary Fund (IMF) has raised objections to Pakistan’s proposal to allocate nearly Rs1 trillion in power subsidies for the next fiscal year, expressing concerns over the rising fiscal burden and persistent inefficiencies in the country’s energy sector.
Government sources said the Power Division of Pakistan informed the IMF that it may require around Rs990 billion in subsidies for fiscal year 2026–27, beginning in July. The proposed allocation is about 11 percent, or Rs100 billion, higher than the Rs893 billion earmarked for the current fiscal year.
A major portion of the subsidy — over Rs400 billion — is intended to cover losses caused by electricity theft and inefficiencies in the power distribution system, according to officials familiar with the discussions.
However, the IMF has reportedly urged the government to reduce the subsidy allocation below the current fiscal year’s level, arguing that continued large-scale financial support undermines efforts to reform Pakistan’s struggling power sector.
Officials noted that the additional Rs100 billion proposed for the next fiscal year roughly equals the amount collected from electricity consumers through cross-subsidies, where users are charged Rs7 to Rs12 per unit to support residential consumers who use less than 300 units per month.
The Power Division has defended the higher subsidy requirement, citing loan write-offs for K-Electric and increased interest payments on circular debt. Officials also pointed to the refusal of Chinese lenders to renegotiate energy contracts, which has added further financial pressure on the sector.
A spokesperson for the Power Division declined to comment on the matter, stating that discussions with the IMF are ongoing and that the Ministry of Finance Pakistan is responsible for responding to questions regarding negotiations with the lender.
For the current fiscal year, the IMF had already capped power subsidies at Rs893 billion, partly to offset the impact of Rs104 billion in lower collections resulting from the levy imposed on captive power plants.
Sources also indicated disagreements between the government and the IMF regarding projections for the circular debt flow in the coming fiscal year. The Power Division estimates that circular debt could increase by more than Rs500 billion, mainly due to lower bill recoveries and persistent electricity theft.
The IMF, however, wants the increase limited to between Rs300 billion and Rs325 billion, which would be lower than the projected level for the current fiscal year.
Pakistan has struggled for years to control circular debt in the energy sector. Under a previous IMF programme from 2019 to 2022, the government had committed to reducing the annual flow of circular debt to zero but failed to meet the target.
Under the current programme, the IMF is allowing some increase in circular debt but only within a defined limit.
Meanwhile, the government recently secured Rs1.23 trillion in fresh loans from commercial banks in an effort to manage the existing circular debt stock. Officials informed the IMF that 18 commercial banks completed the financing transaction in December. Under the arrangement, Rs695 billion in loans were converted into debt under the Power Holding Company Limited, while Rs35 billion was settled against payments owed to the Uch Power Plant.
Despite these measures, the government has acknowledged that completely eliminating the circular debt flow before 2031 is unlikely, highlighting the deep structural challenges facing Pakistan’s power sector.
Story by Shehbaz Rana
