IMF urges Pakistan to cut power sector circular debt

ISLAMABAD: The International Monetary Fund (IMF) has urged Islamabad to shift its focus toward reducing circular debt (CD) in the power sector through deep structural reforms, moving beyond previous flow-containment strategies to address underlying financial distortions.

In its staff report on the second review under the Extended Arrangement of the Extended Fund Facility (EFF), the IMF noted that the restructuring of Rs 1.225 trillion in power sector debt has improved liquidity, created space for social spending, and resolved longstanding financial obligations—without imposing additional costs on end users.

The Cabinet has approved a three-year incremental pricing package for industrial and agricultural users to boost grid demand, with a lower tariff of PRs 22.98/kWh for consumption above a baseline threshold. The scheme will not allow differentiated treatment to specific industries or sectors. A review of the incremental price and scheme will automatically be triggered to incorporate any additional marginal cost if growth of incremental consumption of the industrial and agriculture sectors in aggregate exceeds 25 percent above the baseline in a given month.

Power sector’s circular debt hits Rs1.6trn mark: CPPA-G

Semi-annual reviews of the scheme will ensure continued cost revenue alignment. Any losses due to the scheme’s failure of revenues to keep up with tariffs will be borne fully by higher tariffs on industry and agriculture. Only positive FCAs will be applicable to incremental consumption. The scheme will expire three years from its inception date, with no possibility of rollover, and will be terminated immediately if it requires upward tariff adjustment in two consecutive reviews.

The Fund emphasized that the next phase of reforms must prioritize improving DISCOs’ collections and reducing losses, implementing cost-cutting structural measures, and enhancing private sector participation in DISCOs and GENCOs. It also called for progress on establishing a competitive wholesale electricity market and tackling the RLNG surplus and circular debt stock in the gas sector.

According to the report, government measures to incentivize captive power producers (CPPs) to shift to the national grid have led to a notable rise in industrial power consumption — up 35 percent year-on-year during April –August 2025 — offsetting broader weaknesses in overall electricity demand.

Copyright Business Recorder, 2025