ISLAMABAD:
The International Monetary Fund (IMF) has slashed Pakistan’s power subsidies by Rs143 billion and set a strict target of limiting the flow of circular debt to Rs400 billion this year, the renewed goals that will require improving poor performance rather than continued reliance on taxpayers’ money.
However, contrary to the IMF’s new target of adding only Rs400 billion to the circular debt flow, the Economic Coordination Committee (ECC) of the Cabinet approved a higher flow target of Rs522 billion for the current fiscal year. The ECC approved the target a day after the IMF board meeting that had approved these targets along with the $1.2 billion loan tranche.
Compared to the Rs1.04 trillion budgeted subsidies for the current fiscal year, the IMF has reduced the allocation to Rs893 billion, according to the Fund’s staff report released this week.
“Power subsidies will be contained at Rs893 billion, 0.7% of GDP, reflecting the reduction in the target on circular debt accumulation,” reads the report.
Sources said that during second review discussions, the Power Division resisted IMF proposals to cut subsidies and set a lower target of the flow of the circular debt.
Two opposing targets
The report also revealed that the IMF has set the circular debt flow target at Rs400 billion for this fiscal year, which remains lower than the ECC-approved figure. The IMF said that it set the target on the basis of “strong performance in fiscal year 2025” and assumptions of further underlying improvements in recoveries and technical losses.
It added that the target will be monitored through regular notification of quarterly tariff adjustments and monthly fuel cost adjustments.
The IMF further said that circular debt pressures are expected to ease somewhat this fiscal year due to continued strong industrial demand from the captive power plants levy transition; an additional boost to demand from Pakistan’s planned incremental pricing plan for industrial and agriculture users; and lower interest costs.
However, the ECC this week approved the new Circular Debt Management Plan for this fiscal year, allowing the addition of Rs522 billion in the flow, to be compensated through fiscal support.
Responding to questions about the conflicting targets, the Power Division spokesman said, “there is no disagreement between the Power Division and IMF”.
He added that out of Rs522 billion, Rs400 billion will be managed through the budgeted amount, while Rs122 billion will be the principal repayment through the debt servicing surcharge under the circular debt refinancing scheme.
According to the spokesperson, the net effect on circular debt will be zero, keeping the stock unchanged from last year’s end figures.
But despite the Power Division’s explanation, the IMF does not recognise the Rs522 billion figure in its staff report.
Even after tariff increases and some improvement in recoveries, Rs522 billion will still be added to the circular debt flow. This will then be offset through budgetary injections, leaving the net circular debt level unchanged at Rs1.614 trillion.
The IMF stated in the report that stock clearance subsidies of Rs400 billion would keep net circular debt accumulation at zero this fiscal year, meaning the budget will be used to cover systemic inefficiencies.
The IMF said efforts must now focus on improving bill collections and reducing line losses at power distribution companies, cost-reducing structural reforms, including private sector participation in DISCOs and GENCOs, advancing the wholesale electricity market, and addressing the gas sector’s RLNG surplus and circular debt stocks.
The Rs522 billion addition in the circular debt flow is on account of line losses and non-recoveries not recognised by NEPRA; non-recoveries from supplies to Azad Jammu and Kashmir, other federal and provincial governments including FATA, private consumers, and Balochistan tube wells.
The flow also includes accrued markup from servicing old bank loans, late payment surcharges, delays in subsidy payments, delays in tariff determinations causing pending generation costs, non-payments by K-Electric, and other adjustments.
The government is charging Rs3.23 per unit from electricity consumers to service the circular debt.
It has assured the IMF that it will shift the annual rebasing period from July to January, beginning January 2026, to smooth the impact of tariff increases on consumers.
