How would IMF subsidy cut affect your electricity bill this summer?

ISLAMABAD: The International Monetary Fund (IMF) has mandated a significant reduction in Pakistan’s electricity subsidy, slashing it by Rs 143 billion for the current fiscal year. This decision is part of Pakistan’s efforts to address the mounting financial mismanagement within the power sector, with the IMF urging greater efficiency and less reliance on taxpayer funds. This might lead to increased power bills in the coming summer months.

According to the IMF’s staff report, the total volume of the electricity subsidy will now be capped at Rs 893 billion, down from the previously allocated Rs 1.04 trillion. This reduction represents 0.7 per cent of the country’s Gross National Product (GNP), a significant decrease that aims to bring Pakistan closer to fiscal sustainability.

However, the decision comes with concerns that rising electricity costs will burden consumers. As the government works to implement the subsidy cuts, there are fears that electricity prices will increase to offset the reduced financial support.

CIRCULAR DEBT TARGET: IMF VS GOVT

Alongside the subsidy cuts, the IMF has set a target of limiting circular debt flow to Rs 400 billion during this fiscal year. This target is based on expectations of improved bill collection, reduced technical losses, and overall better performance in Pakistan’s electricity sector. Circular debt, which refers to the outstanding payments between power sector entities, has been a long-standing issue in Pakistan’s energy crisis.

Despite this, the Economic Coordination Committee (ECC) of the federal cabinet approved a circular credit flow target of Rs 522 billion, a decision made just a day after the IMF board approved a $1.2 billion tranche for Pakistan. The difference in targets has sparked confusion over the government’s commitment to IMF conditions.

IMF’S STANCE ON CIRCULAR DEBT

The IMF’s report noted that the circular debt burden should be reduced to zero through stock clearance subsidies amounting to Rs 400 billion. This implies that the government will need to use the budget to cover the shortfall in the system’s finances. The IMF also outlined several key steps for resolving the circular debt issue, including:

• Improved bill collection in power distribution companies.
• Reducing line losses in the electricity network.
• Encouraging private sector participation and developing a wholesale power market.
• Addressing surplus RLNG and resolving issues in the gas sector.

The IMF also warned that the reasons behind the escalating circular debt flow include line losses, non-recoveries, and unpaid bills from regions like Azad Kashmir, former FATA, and several provincial and federal institutions. Additionally, delayed subsidy payments, tariff determination delays, and non-payments by K-Electric have exacerbated the situation.

GOVERNMENT’S RESPONSE

A spokesperson from the Power Division clarified that despite the IMF’s target of Rs 400 billion, the Rs 522 billion figure approved by the ECC will be managed through a debt servicing surcharge under the circular debt refinancing scheme. The spokesperson stressed that this new plan would not change the overall volume of circular debt, as Rs 400 billion will be covered through the budget, while Rs 122 billion will be paid from the surcharge.

The government has assured the IMF that from January 2026, the tariff rebasing process will shift from July to January to gradually transfer the burden of rising costs to consumers.