Pakistan, IMF Set Terms for Power Tariff Rebasing in FY2025–26
The Government of Pakistan and the International Monetary Fund (IMF) have reached a significant understanding that could lead to electricity tariff increases starting July 2025, contingent on the revenue needs of the power sector exceeding a fixed subsidy envelope. The decision forms a key pillar of Pakistan’s ongoing effort to rein in circular debt and restore fiscal discipline under IMF oversight.
Key Agreement Highlights:
According to well-placed sources in the Finance Ministry, both parties agreed that if power sector revenue shortfalls exceed the Rs 1.036 trillion subsidy envelope for FY2025–26, the deficit will be addressed through annual tariff rebasing—a mechanism that adjusts electricity prices to reflect cost changes.
The understanding was finalized during the May 14–24 IMF mission to Islamabad.
Reallocation and Recalibration: The Fiscal Fine Print
To ensure zero circular debt flow in FY2026, the government plans to count Rs 182 billion from the Petroleum Development Levy (PDL)—which finances the Prime Minister’s electricity relief package—as part of the official subsidy allocation.
“Fiscal discipline remains paramount,” IMF officials reportedly emphasized, insisting that energy subsidies be capped at 0.8% of GDP and be tied to stock clearance and loss reduction targets.
As part of its internal budgeting process, the Finance Division revised its Indicative Budget Ceilings (IBCs), raising sector subsidy allocations for FY2025–26 to Rs 636.136 billion, up from Rs 400 billion initially allocated.
Rising Pressures: Protected Consumers, Declining Industry Use
The government faces a tough balancing act. On one hand, the number of protected consumers—those using less than 200 units per month—is rising. Many households are adjusting usage or installing solar panels to remain within this category, increasing the overall subsidy burden.
On the other hand, industrial and commercial electricity consumption is declining, reducing cross-subsidy contributions from high-paying sectors. This trend threatens the integrity of the tiered tariff model, placing additional pressure on government finances.
Sources within the Power Division caution that FY2025 subsidies may surpass Rs 1.2 trillion, a figure well above the officially agreed envelope with the IMF.
Tackling Circular Debt: CDWAP and PHL Reforms
As part of its broader six-year debt reduction strategy, the government aims to clear Rs 541 billion in circular debt stock in FY2025. This initiative is tied to two major structural efforts:
- Circular Debt Workout and Action Plan (CDWAP)
- Restructuring of Pakistan Holding Limited’s (PHL) liabilities
Both programs are expected to reduce future borrowing costs and stabilize the circular debt cycle, which has plagued Pakistan’s energy sector for over a decade.
Budget Discipline and Political Sensitivity
The Finance Division has issued strict directives to Principal Accounting Officers (PAOs) and related departments to ensure budget estimates are prepared with rigorous cost-center-level planning. However, political sensitivities and industry lobbying continue to constrain the government’s ability to fully pass cost increases on to end-users.
With tariff rebasing now tied directly to subsidy ceilings, the government’s room to maneuver is narrowing. The success of this strategy will depend on both fiscal discipline and political will, especially heading into a potentially turbulent economic period.