IMF objects to Rs1tr power subsidy. Design: Mohsin Alam
ISLAMABAD:
The International Monetary Fund (IMF) has objected to Pakistan’s proposal to allocate nearly Rs1 trillion for power subsidies in the next fiscal year, including over Rs500 billion to cover electricity theft and inefficiencies.
The continued bleeding of the power sector and mammoth budgetary allocations every year negate the government’s claim that it has improved the sector’s performance during the past two years. Government sources said the Power Division informed the IMF that it may need Rs990 billion in power subsidies for fiscal year 2026-27, starting in July. The amount is 11%, or Rs100 billion, higher than this year’s allocation.
The additional Rs100 billion is roughly equal to the amount the government collects from electricity consumers by forcing them to pay Rs7 to Rs12 per unit to cross-subsidise residential consumers using below 300 units per month. Sources said the IMF objected to the proposal and asked the government to reduce the allocation below the current fiscal year’s Rs893 billion.
The Power Division argued that additional subsidies were needed to pick up the loan write-offs of K-Electric and higher interest payments on circular debt after China refused to renegotiate its energy contracts.
The Power Division spokesman declined to comment, saying it cannot comment on the matter under discussion and that only the finance ministry could respond on IMF talks. For the current fiscal year, the IMF had reduced power subsidies to Rs893 billion to offset the impact of Rs104 billion lower collections due to the captive power plants levy.
Sources said there were also differences over the projected increase in circular debt flow in the next fiscal year due to lower recoveries and electricity theft.
Reducing the flow of circular debt to zero was also a target of the IMF programme during 2019-22, which Pakistan failed to achieve.
Under the current programme, the IMF is again allowing some increase in circular debt, but only within a permissible limit.
Sources said the Power Division projected over Rs500 billion in additional circular debt during the next fiscal year. However, the IMF wanted the flow restricted to Rs300 billion to Rs325 billion, lower than the current year’s level.
Pakistan’s power sector crisis stems from high transmission and distribution losses, demand-supply mismatch, delays in tariff adjustments and persistent governance issues, mainly electricity theft and poor bill recoveries. Last month, Power Minister Sardar Awais Leghari said the cost of theft and inefficiencies was not included in tariffs and was paid by the finance ministry through subsidies.
However, these subsidies are ultimately paid by taxpayers in the shape of a 38.5% income tax imposed on the salaried class. The salaried class paid Rs606 billion in income tax last year.
The power minister had also admitted in a media briefing that the government lost Rs497 billion during the last fiscal year due to theft and low recoveries. The IMF was informed that losses could not be reduced due to the law and order situation in Khyber-Pakhtunkhwa and Balochistan.
However, the Power Division did not provide a satisfactory explanation to the IMF regarding higher losses in Sindh, said sources.
The boards of the Hyderabad Electric Supply Company (HESCO) and Sukkur Electric Power Company (SEPCO) have completed their terms and the government is in the process of nominating new board members. Under the power-sharing arrangement between the Pakistan Peoples Party (PPP) and Pakistan Muslim League-Nawaz (PML-N), the board members of HESCO and SEPCO are nominated by the PPP.
Instead of improving efficiency and reducing losses, there has been an increasing emphasis on raising electricity prices to offset power sector losses. This has forced many consumers to move off the national grid. However, consumers are again being pushed to purchase expensive electricity after the government shelved the net metering policy.
Sources said the Power Division informed the IMF that the government was shifting from net metering to a net billing policy.
Under the proposed system, the government would sell electricity from the national grid at prevailing rates of up to Rs60 per unit but purchase solar-generated electricity at less than Rs9 per unit. The sold and purchased units would now be treated separately.
In addition, electricity prices are being adjusted through annual base tariffs, notified last month, monthly fuel cost adjustments and quarterly tariff Adjustments notified in November. The IMF was informed that for the second quarter, power distribution companies have already filed petitions before the National Electric Power Regulatory Authority (Nepra).
The government has also taken Rs1.23 trillion in fresh debt from commercial banks to reduce the stock of circular debt. The IMF was informed that 18 commercial banks completed the transaction in December, under which a Rs695 billion loan was replaced with Power Holding Company debt and Rs35 billion was settled against the Uch plant payables.
The government has admitted that the flow of circular debt cannot be reduced to zero before 2031.
