ISLAMABAD: The government is reportedly facing an embarrassing situation with the International Monetary Fund (IMF) after failing to meet its commitment to contain the power sector’s circular debt at Rs1.614 trillion by June 30, 2026.
Background discussions with officials and available documents suggest that the primary reasons for missing the target include non-payment of around Rs200 billion by K-Electric (KE) against power purchase dues and the weak financial performance of several power Distribution Companies (Discos) during the fiscal year.
“We are short of about Rs300 billion as of June 30, 2026, due to non-payment by KE and poor performance of some Discos. When due amounts are not available, how can circular debt flow be contained to zero?” an official said on condition of anonymity.
READ MORE: Circular debt: Govt to cut KE claims by billions to meet IMF targets
According to sources, the circular debt stock in the power sector stood at Rs1.835 trillion as of June 30, 2026, against the target of Rs 1.614 trillion, despite adjustments made against KE’s claims following cabinet approval.
The IMF’s Staff Report released last month noted that the circular debt flow had over-performed targets in March and June, supported by lower international hydrocarbon prices, improved recoveries, reduced technical losses, and declining interest rates. These factors generated subsidy savings, which helped bring the circular debt stock down by Rs779 billion to Rs1.614 trillion (1.4 percent of GDP) by the end of June.
However, official documents reveal that the Power Division recently informed the Economic Coordination Committee (ECC) that circular debt remained a major concern, having reached Rs1.924 trillion as of May 31, 2026, including Rs873 billion payable to banks under circular debt financing.
The Power Division further stated that Rs893 billion had been allocated for power sector subsidies for FY2024-25. Of this, Rs257 billion was earmarked under Finance Division Demand No. 45 for payments to government power plants (GPPs) and Independent Power Producers (IPPs) as government equity. So far, Rs105 billion has been released, while Rs152 billion remains to be disbursed to CPPA-G before the close of the fiscal year.
The Division clarified that the proposal does not seek additional fiscal support but aims to utilise a Technical Supplementary Grant (TSG) to reduce the circular debt stock in line with the Circular Debt Management Plan (CDMP) and IMF commitments. It warned that despite some improvement in Discos’ performance, the circular debt stock had already exceeded Rs1.9 trillion by the end of May 2026, making it difficult to meet the target without timely release of allocated funds, including the TSG.
Regarding surplus funds under KE’s Tariff Differential Subsidy (TDS), the Power Division noted that KE has not cleared its electricity dues, contributing approximately Rs200 billion to the circular debt buildup. As KE’s tariff matters are sub judice, the Division proposed re-appropriating these funds to meet sectoral cash flow requirements and IMF-agreed targets.
It was proposed that the remaining Rs97.649 billion under the KE TDS head be re-appropriated and released in June 2026. The proposal was supported by CPPA-G and PPMC, which stressed the need for full release of budgeted subsidies before June 30, 2026.
The Power Division requested the ECC to: (i) approve a TSG of Rs152 billion from Finance Division Demand No. 45 to Demand No. 33 for immediate release to CPPA-G as government equity in Discos; and (ii) approve re-appropriation of Rs97.649 billion from KE TDS (IB-9050) to Inter-Disco Tariff Differential (IB-9048).
Two options were presented: (i) release of the full Rs97.649 billion as advance subsidy against future tariff differential claims, along with adjustment of TESCO’s TDS arrears of Rs44.198 billion against outstanding subsidy advances; or (ii) release of Rs53.451 billion as advance subsidy and Rs44.198 billion specifically for TESCO arrears.
During the discussion, the ECC was informed that KE’s non-payment of dues has significantly contributed to circular debt accumulation. The forum directed the Power Division to actively pursue the legal case following the High Court’s decision, in consultation with the Ministry of Law and Justice and the Attorney General. The Division assured that the case would be pursued from July 2026.
The ECC considered the summary dated June 16, 2026, titled “Release of Rs152 billion TSG as equity in Power Distribution Companies and re-appropriation of available budget,” and partially approved the proposal, allowing Rs54.451 billion after adjusting Rs97.549 billion from the total Rs152 billion.
Sources said the Power Division is actively pursuing the case against K-Electric and is hopeful that the court will deliver a verdict during the current month.
Copyright Business Recorder, 2026
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