ISLAMABAD: Prime Minister Shehbaz Sharif’s government has made a series of new commitments to the International Monetary Fund (IMF) focused on reforming Pakistan’s energy sector — including both power and gas.
These commitments include regular tariff increases, transferring circular debt (CD) to the Central Power Purchasing Agency (CPPA-G), and a complete halt on introducing new subsidies for electricity or gas.
The strategy was developed in consultations with the IMF mission between February 24 and March 14, 2025, and continued virtually thereafter.
PM Shehbaz unveils Rs7.41 per unit electricity rate cut to boost ailing economy
According to sources in the Finance Ministry, deep-rooted reforms to reduce costs in the energy sector are seen as the only viable path to sustainability and lower tariffs.
Pakistan’s updated energy strategy targets halting the growth of circular debt while ensuring structural reforms that balance sector viability with consumer protection—especially for vulnerable populations. These efforts yielded better-than-expected results in the first half of FY25, outperforming projections by Rs450 billion due to reduced financing costs and improved recoveries.
By January 2025, the power sector’s circular debt had reached Rs2,444 billion (2.1 per cent of GDP), while gas sector CD was Rs2,294 billion (2.2 per cent of GDP) as of June 2024. Authorities have assured the IMF of their commitment to keeping energy tariffs cost-reflective, reducing fiscal risks, ensuring debt sustainability, and fostering a pro-growth business environment. They aim for net-zero circular debt flow by the end of FY25 and will strive for the same in FY26 through tariff adjustments, targeted subsidies, and continued reforms.
According to the Circular Debt Management Plan shared with the IMF, Islamabad has promised timely electricity tariff increases consistent with cost with cost recovery.
The NEPRA will continue with timely automatic notifications of regular quarterly tariff adjustments (QTAs) and monthly fuel cost adjustments (FCAS) to capture any gaps between the base tariff and actual revenue requirements that arise during the year, to prevent CD flow. We will ensure the full implementation of the July 2025 annual rebasing (new SB, July 1, 2025), QTRs, and FCAs going forward. All provinces agree not to introduce any subsidy for electricity or gas.
On the issue of reduction in circular debt, it has been promised that reducing the financial burden on the power sector by converting the existing CD stock to CPPA debt.
Power sector’s existing CD stock is of Rs2.4 trillion (2.1 percent of GDP) which will be clear, by end-FY25, Rs348 billion via renegotiation of arrears with IPPs (PRs127 billion of which will be via already-budgeted subsidy for CD stock clearance and Rs221 billion of which will be via CPPA cash flow); Rs387 billion via waived interest fees; and Rs254 billion via additional already-budgeted subsidy for CD stock clearance; Rs224 billion in non-interest-bearing liabilities will not be cleared.
The remaining Rs1.252 trillion will be borrowed from banks to repay all PHL loans (Rs683 billion) and to clear the remaining stock of interest-bearing arrears to power producers (Rs569 billion).
The loan will be taken on at a rate favorable to that currently paid on the CD stock (a major driver of CD flow and accumulation) and annual payments will be financed through Debt Service Surcharge (DSS) revenues over six years.
The DSS will be set at 10 percent of the NEPRA-determined revenue requirement, adjusted each year at the time of annual rebasing, per current practice. In the event that DSS revenues fall short of the annual payment requirement, the DSS will be increased to make up for the shortfall and calibrated per any anticipated future shortfalls in the succeeding year. To facilitate this, the government will adopt legislation to remove the 10 percent DSS cap by end-June 2025 (new end-June 2025 SB). There will be no fiscalisation of any revenue shortfall.
The government will prepare a plan to retire, in a timely way, the interest-bearing CD stock anticipated at the end of FY25 (expected to be no greater than Rs337 billion, a result of gross flows this year), alongside the FY26 budget process, which will not utilise subsidy resources. With one of the primary drivers of CD flow-interest charges on delayed payments to IPPs significantly reduced, CD targets have been set lower. These targets will continue to decline to zero by FY31, the end of the operation.
On budget allocations for power subsidies, the authorities have stated that with signs of energy sector reforms already having some initial impact in terms of reducing electricity costs, the FY26 budget will include lower subsidies than in FY25. This reflects the impact of the aforementioned CD stock operation (which lowers the need for CD stock payments) and the ongoing impact of our energy sector reform strategy.
Nonetheless, the government has decided from March 17, 2025, to introduce a limited subsidy, financed by a Rs10 per litre PDL increase, which will expire on June 30, 2026, at an annualized amount of Rs182 billion.
These revenues will finance a subsidy to be applied to all non-lifeline consumer categories, resulting in an average electricity tariff reduction of PRs 1.7/kWh. The government has also begun to receive flows from the captive power plant (CPP) transition levy, the revenue from which will allow for additional tariff reduction (through this financed subsidy) for all grid consumers: The government has estimated the impact to be PRS 0.90/kWh at the start, anticipating further reductions as the CPP levy is increased at regular intervals already in law through 2026. These subsidies will allow front loading of our reforms’ benefits to be felt by grid consumers while e the longer-term structural cost reduction impact of the reform process, including from the CPP transition, gradually takes effect.
The subsidy will be limited to at most 0.8 percent of GDP and will cover (i) PDL-derived revenues of Rs182 billion noted above to provide further temporary tariff relief; (ii) the projected tariff differential; arrears payments of Fata and KE; (iv) agricultural tubewells; and (v) O stock payments to compensate for the any CD flow, which will be targeted to be much lower following the CD conversion operation.
The authorities have also recognized the need to continue and accelerate cost-side reforms to address the sector’s fundamental challenges and are moving forward, with the assistance of the World Bank, the ADB, and other development partners.
Copyright Business Recorder, 2025
Comments