The International Monetary Fund (IMF) has lowered Pakistan’s projected electricity subsidy allocation for FY2026-27, signaling growing confidence in the country’s ongoing power sector reforms and efforts to control circular debt.
Under the IMF’s latest review of Pakistan’s economic programmed, the allocation for power subsidies has been reduced from 0.7% of GDP to 0.6% of GDP, while the target for annual circular debt accumulation has also been tightened.
The move reflects the Fund’s expectation that recent tariff adjustments, operational improvements, and structural reforms will gradually strengthen the financial position of Pakistan’s energy sector.
Power Subsidies Limited to Rs830 Billion
According to the IMF review, Pakistan’s FY27 budget will include electricity subsidies capped at Rs830 billion.
These subsidies will primarily cover:
- tariff support for power distribution companies and K-Electric,
- electricity subsidies for former FATA areas,
- assistance for agricultural tube-wells,
- and payments linked to existing circular debt obligations.
The reduction in projected subsidy spending indicates that the IMF expects the government to rely less on fiscal support and more on cost recovery measures within the energy system.
Lower Circular Debt Target for FY27
Pakistan’s circular debt flow target for FY27 has been set at Rs300 billion, which is Rs100 billion lower than the previous fiscal year’s target.
Circular debt continues to burden the power sector due to issues such as transmission losses, delayed recoveries, inefficiencies, and subsidy pressures.
The IMF noted that regular tariff revisions have helped improve financial stability in the sector and stressed the importance of continuing these adjustments to avoid fresh debt accumulation, especially during periods of global fuel price volatility.
Industrial Relief Balanced Through Residential Charges
The report also highlighted recent changes in electricity pricing.
While industrial consumers received tariff relief earlier this year to support economic activity and exports, the financial impact was offset through increased fixed charges for residential consumers, including some protected user categories.
The IMF encouraged Pakistan to preserve a progressive tariff system while improving subsidy targeting so that lower-income households continue receiving adequate support.
Privatisation and Market Reforms Continue
The Fund reiterated that privatization of power distribution companies remains a key part of Pakistan’s reform roadmap.
According to the report, the government has agreed to complete important preconditions for privatization by December 2026.
In parallel, authorities have finalized restructuring of the transmission network and are preparing to launch wholesale electricity auctions by mid-2026.
These reforms are intended to introduce greater competition, improve efficiency, and reduce financial losses in the power sector.
Solar Expansion Creates New Challenges
The IMF also commented on Pakistan’s rapidly growing solar energy market.
The report noted that rising electricity prices, falling solar panel costs, and generous net metering incentives have accelerated solar adoption across the country.
While this shift has helped consumers lower their electricity bills, it has also reduced grid electricity demand, putting additional financial pressure on the power sector.
To address this issue, Nepra recently shifted from net metering to net billing for solar consumers. The IMF said this policy change could help create a more balanced relationship between solar users and the national grid.
However, existing users will continue receiving exemptions in the short term, meaning cross-subsidy pressures are expected to remain for now.
Progress on IPP Agreements
Pakistan also updated the IMF on negotiations with independent power producers (IPPs) as part of its broader circular debt reduction strategy.
Authorities said settlements with several IPPs are expected to be completed by the end of June 2026.
At the same time, efforts to resolve long-standing financial disputes involving K-Electric are likely to continue until September 2026.
Conclusion
The IMF’s decision to reduce Pakistan’s projected power subsidy allocation reflects cautious optimism about ongoing reforms in the electricity sector.
By tightening subsidy limits, reducing circular debt targets, and pushing ahead with tariff and structural reforms, Pakistan aims to place the power sector on a more sustainable financial footing.
However, the transition may continue to place pressure on consumers already dealing with rising electricity costs, making balanced implementation of reforms critical in the years ahead.