Govt to Cut KE Claims by Billions to Meet IMF Circular Debt Targets

The federal government is preparing to reduce billions of rupees in pending claims owed to K-Electric (KE) as part of its commitment under the IMF’s Memorandum of Economic and Financial Policies (MEFP) to lower Pakistan’s circular debt (CD) stock to Rs1.6 trillion by June 30, 2026, according to sources in the Power Division.

 

During a briefing to the Economic Coordination Committee (ECC) on June 24, 2026, the Ministry of Energy (Power Division) outlined ongoing efforts to address financial challenges in the power sector, with the growing circular debt remaining a major concern.

 

As of May 31, 2026, circular debt had reached Rs1.924 trillion, including Rs873 billion in liabilities owed to banks under circular debt financing. The remaining amount comprises outstanding payments to power producers, the National Grid Company (NGC), and other stakeholders.

 

The Power Division warned that the mounting liabilities are becoming increasingly difficult to sustain, placing Independent Power Producers (IPPs) under financial strain and affecting their ability to service debt and maintain operations.

 

Officials informed the ECC that timely payments to power producers are essential to prevent disruptions in electricity generation and support economic activity. Since payments to IPPs are backed by sovereign guarantees, delays could trigger guarantee claims and additional late payment charges. Releasing subsidies on time would help reduce financing costs and keep circular debt within targeted levels.

 

For FY2025-26, the government allocated Rs893 billion in power sector subsidies, including Rs257 billion designated as government equity for government-owned power plants and IPPs through Finance Division Demand No. 45. Of this amount, Rs105 billion has already been released, while the remaining Rs152 billion is yet to be transferred to the Central Power Purchasing Agency-Guarantee (CPPA-G).

 

The Power Division noted that although the Ministry of Finance recommended meeting funding needs through budget reallocation under the Circular Debt Management Plan (CDMP) 2025-26, the proposal was intended to reduce the overall circular debt stock rather than seek additional fiscal support. It stressed that without the release of the remaining funds, achieving the IMF-agreed circular debt target would be difficult despite improvements in the performance of power distribution companies (DISCOs).

 

Regarding K-Electric, the Power Division stated that the utility has outstanding electricity dues of around Rs200 billion, which have significantly contributed to circular debt. Since KE’s tariff-related dispute remains before the courts, the ministry proposed reallocating the unused Rs97.649 billion earmarked under KE’s Tariff Differential Subsidy (TDS) to support the broader power sector’s cash flow requirements and help meet IMF commitments.

 

The proposal, backed by both CPPA-G and the Power Planning and Monitoring Company (PPMC), called for the reallocation and release of the remaining KE TDS allocation before the end of June 2026.

 

The Power Division asked the ECC to approve a Technical Supplementary Grant (TSG) of Rs152 billion for immediate transfer to CPPA-G as government equity for DISCOs, along with the reallocation of Rs97.649 billion from KE’s TDS budget to the Inter-DISCO Tariff Differential head.

 

Two funding options were presented: releasing the full Rs97.649 billion as advance subsidy against future tariff differential claims while adjusting TESCO’s Rs44.198 billion in outstanding TDS arrears, or releasing Rs53.451 billion as advance subsidy and separately allocating Rs44.198 billion to settle TESCO’s arrears.

 

During the meeting, ECC members were informed that KE’s unpaid dues had materially contributed to the accumulation of circular debt. The committee directed the Power Division to actively pursue the legal proceedings following the High Court’s ruling in consultation with the Ministry of Law and Justice and the Attorney General, with the division confirming that legal action would be intensified from July 2026.

 

The Minister for Petroleum also informed the ECC that KE had been issued disconnection notices for breaching guarantee obligations and urged the Power Division to address the matter promptly. The committee instructed both the Petroleum and Power Divisions to resolve the issue on a priority basis.

 

After reviewing the June 16, 2026 summary on the release of the TSG and budget reallocation, the ECC partially approved the proposal, authorising the release of Rs54.451 billion after adjusting Rs97.549 billion from the total Rs152 billion allocation.