ISLAMABAD: The International Monetary Fund (IMF) has called for a significant reduction in Pakistan’s power sector subsidies, cutting them by Rs143 billion and setting an annual circular debt flow target of Rs400 billion.
The IMF has focused on the fact that this goal should be achieved through improved efficiency and performance, rather than relying solely on taxpayer-funded support.
In this regard, power subsidies for the current fiscal year have been capped at Rs893 billion, down from Rs1.04 trillion. This level represents approximately 0.7 percent of the country’s gross domestic product (GDP).
The report noted that the reduction in subsidies is directly linked to efforts to limit the growth of circular debt in the power sector. Furthermore, the IMF explained that the lower circular debt target reflects expectations of improved operational performance during fiscal year 2025.
These improvements include higher bill recovery rates, reduced transmission and distribution losses, and the timely implementation of quarterly tariff adjustments and monthly fuel price adjustments to contain financial pressures in the sector.
However, a divergence has emerged at the domestic level. One day after the IMF Board approved a $1.2 billion loan tranche for Pakistan, the federal cabinet’s Economic Coordination Committee (ECC) approved a higher circular debt flow target of Rs522 billion for the same fiscal year.
This figure is substantially above the IMF’s recommended ceiling of Rs400 billion.
Meanwhile, the Power Division has rejected claims of any disagreement with the IMF. A spokesperson stated that there is no conflict between the two sides and clarified the structure of the ECC-approved plan.
In addition, as per the spokesperson, out of the Rs522 billion circular debt flow, Rs400 billion will be covered through budgetary support, and the remaining Rs122 billion will be managed through the circular debt refinancing scheme.
This amount will be paid as principal through the debt servicing surcharge, ensuring that overall circular debt does not increase.
The IMF staff report does not recognize the Rs522 billion target approved by the ECC. The report noted that although electricity tariffs have been increased and bill recoveries have improved, the additional amount would still be counted as part of the circular debt flow and would ultimately need to be covered through the federal budget.
