IMF allows Rs830b power subsidies

The International Monetary Fund (IMF) has allowed Pakistan to allocate Rs830 billion for power subsidies in the new budget. The amount includes Rs300 billion to pay for electricity theft and poor bill recovery. The lender also imposed a new condition to increase electricity prices in January 2027, according to government sources.

The decision underscores a contradiction in the IMF's approach towards Pakistan where it is sanctioning hundreds of billions of rupees for electricity subsidies but was not comfortable with subsidies on petrol and diesel.

The IMF has also asked Pakistan to increase electricity prices in January 2027 on account of annual price adjustment, which should fully reflect the impact of rising generation cost due to the Middle East conflict, said government sources. They added that Pakistan has accepted the IMF's condition as a new structural benchmark of the $7 billion bailout package.

The government assured the lender that timely electricity tariff adjustments would be consistent with cost recovery that remains progressive. It said increases would be balanced across consumer categories.

This includes the National Electric Power Regulatory Authority (NEPRA)'s continued timely notifications of quarterly tariff adjustments (QTAs) and automatic monthly fuel charges adjustments (FCAs), as well as full implementation of the January 2027 annual rebasing, all of which will continue in the context of recent global energy market volatility.

The sources said the IMF also permitted Rs830 billion for power subsidies for the fiscal year 2026-27, 16% less than the demand made by the government.

The subsidy has been allowed on account of tariff differential impact, clearance of erstwhile Federally Administered Tribal Areas (FATA) arrears, agriculture tube wells, circular debt repayments and more importantly to offset the cost of inefficiencies and theft.

The sources said Pakistani authorities have assured they remain committed to ensuring the power sector's financial viability through timely tariff increases that recover costs and prevent a recurrence of circular debt.

However, despite price increases under every IMF programme, circular debt has not ended and instead keeps increasing, showing the failure of the programme design.

Sources said the government also accepted the IMF's stance that implementation of necessary price adjustments in the context of recent shocks to global energy markets was critical to ensuring the sector's viability and broader macroeconomic stability without unduly burdening the budget.

But, once again, the IMF allowed a Rs300 billion increase in circular debt for the next fiscal year. This comes after a Rs400 billion increase projected for this fiscal year, offset by budget subsidies. The IMF was comfortable with yet another promise to end circular debt in 2031.

While the IMF generously allowed Rs830 billion in power subsidies, it stopped the government from giving fuel subsidies despite global price shocks caused by the war.

Both parties agreed that the Rs830 billion subsidy would cover the projected tariff differential for Distribution Companies (Discos) and K-Electric (KE); current and arrears payments of FATA, agricultural tube wells, and circular debt stock payments to counterbalance the anticipated Rs300 billion circular debt flow.

The government also reassured the IMF it would finalise arrangements with several Independent Power Producers (IPPs) with whom penalty payments on arrears were to be waived as part of the broader circular debt stock reduction operation, which remains incomplete. So far, sponsors of power plants set up under the China-Pakistan Economic Corridor (CPEC) have not agreed to waive arrears to claim their principal amounts, said the sources.

Pakistan promised the IMF it would finalise arrangements with all IPPs by end-June 2026. It would also try to resolve a dispute with KE, currently under litigation, which has resulted in significant non-payment and arrears by the end of December 2026, said the sources.

The government has once again promised that private sector participation in Disco management would improve performance, efficiency and governance and address power sector circular debt drivers, helping to mitigate the need for higher tariffs.

It has, however, delayed the privatisation of Islamabad, Gujranwala and Faisalabad power distribution companies until next year after promising to privatise all these entities by early 2026. The sources said the IMF was comfortable with the delay in privatisation.

The government informed the IMF it was assessing the viability of privatising Nandipur and Guddu power plants. However, there is hardly any chance for the success of these plans.

The government said it would facilitate the move to renewable energy and rationalise capacity relative to demand while securing grid sustainability. The publication of the revised 2025-35 Integrated System Plan has been delayed as public hearings have been more extensive than expected. The plan combines capacity and transmission planning and aims to reduce excess capacity and deliver significant savings.

The IMF has also imposed a new condition to strengthen human resources and secure a sustainable fee-based financing mechanism for a power sector management company to ensure its financial sustainability and resource adequacy.