Power tariff hike: govt reaches ‘understanding’ with IMF

ISLAMABAD: The government and the International Monetary Fund (IMF) have reportedly reached an understanding that electricity tariffs will be increased through annual rebasing from July 2025 if the power sector’s revenue requirements exceed the allocated subsidy envelope of Rs 1.036 trillion for fiscal year 2025–26, well-informed sources in the Finance Ministry told Business Recorder.

This understanding was reached during discussions between Pakistani authorities and the visiting IMF mission held from May 14 to 24, 2025.

“Within the Rs 1.036 trillion envelope, sufficient subsidy will be allocated to ensure zero circular debt flow in FY26. The Petroleum Development Levy (PDL)-financed Prime Minister’s package—amounting to Rs 182 billion—will be counted toward the FY26 subsidy,” the sources added.

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Both sides also agreed that any additional financial needs will be met through tariff adjustments during the July rebasing exercise while maintaining a progressive power tariff structure, the sources maintained.

According to sources, the IMF emphasized the importance of fiscal discipline, with subsidy levels expected to remain within 0.8% of GDP. These subsidies will be linked to credible targets for stock clearance and loss reduction.

The Power Division has been directed to take all necessary steps to implement the measures agreed upon with the IMF.

The government had earmarked Rs 1.190 trillion for the power sector for FY2024–26. However, the Power Division has also secured approval for additional subsidies to keep the circular debt flow within the limit agreed with the Fund.

The Finance Division has revised and communicated provisional Indicative Budget Ceilings (IBCs), allocating Rs 636.136 billion for sector subsidies under the recurrent budget for FY2025–26, up from the earlier allocation of Rs 400 billion.

As the detailed breakdown of the revised subsidy for FY2024–25 is not available, it remains unclear whether the full allocation has been utilized by the Power Division or if deviations occurred.

Sources within the Power Division believe that subsidies for FY2025 may exceed Rs 1.2 trillion, driven by growing support for residential consumers and persistent circular debt obligations.

“A sharp increase in protected consumer categories—those consuming less than 200 units per month—is driving higher subsidy needs, as more consumers adjust their consumption or install solar panels to stay within the protected threshold,” the sources said.

Cross-subsidy pressures are also rising, as declining industrial and commercial consumption reduces the contribution of higher-paying users to the overall system.

The government also plans to clear up to Rs 541 billion in circular debt stock during FY2025, as part of a broader six-year debt reduction strategy.

“Subsidy allocations remain a contentious issue, particularly concerning the treatment of PDL proceeds and their role in budget financing,” the sources continued.

Tariff rebasing and further adjustments remain under government consideration to close the subsidy gap. However, political sensitivities and lobbying from industrial stakeholders are limiting policy flexibility.

The successful implementation of the Circular Debt Workout and Action Plan (CDWAP) and the ongoing restructuring of Pakistan Holding Limited’s (PHL) debt are seen as critical to reducing future interest costs and stabilizing circular debt flows.

Additionally, the Finance Division has directed the Power Division to strictly follow mandatory instructions issued to all Principal Accounting Officers (PAOs), heads of departments, and related entities when preparing budget estimates for each cost center and account head.

Copyright Business Recorder, 2025