Power sector circular debt remains a major challenge for government in IMF talks.

Pakistan's government is facing increased pressure from the International Monetary Fund (IMF) after missing its commitment to reduce the power sector's circular debt to Rs1.614 trillion by June 30, 2026, largely due to unpaid dues from K-Electric (KE) and the weak financial performance of several power distribution companies (Discos).

 

Officials familiar with the matter said the circular debt target was missed by nearly Rs300 billion, with around Rs200 billion linked to KE's outstanding power purchase payments. They argued that containing circular debt was difficult without the recovery of these receivables.

 

According to government sources, the circular debt stock reached Rs1.835 trillion by the end of June 2026, exceeding the agreed target despite adjustments made following cabinet approval related to KE's claims.

 

Last month's IMF Staff Report had projected that lower global fuel prices, better bill recoveries, reduced transmission losses, and declining interest rates would help bring the circular debt stock down to Rs1.614 trillion, supported by subsidy savings amounting to Rs779 billion.

 

However, official documents submitted by the Power Division to the Economic Coordination Committee (ECC) showed that circular debt had climbed to Rs1.924 trillion by May 31, 2026, including Rs873 billion owed to banks under circular debt financing arrangements.

 

The Power Division stated that Rs893 billion had been allocated for power sector subsidies during FY2025-26, including Rs257 billion earmarked for payments to government power plants (GPPs) and independent power producers (IPPs). Of that amount, Rs105 billion had been released, while Rs152 billion remained pending for disbursement to the Central Power Purchasing Agency (CPPA-G).

 

The ministry emphasized that it was not seeking additional fiscal support but requested a Technical Supplementary Grant (TSG) to help reduce circular debt in line with the Circular Debt Management Plan (CDMP) and IMF commitments. It warned that without the timely release of allocated funds, meeting the agreed target would not be possible.

 

The Power Division also pointed to KE's unpaid electricity dues, estimating that they had added roughly Rs200 billion to the circular debt stock. Since KE's tariff matters remain before the courts, the ministry proposed reallocating unused funds under KE's Tariff Differential Subsidy (TDS) to support sector liquidity and meet IMF targets.

 

It recommended reallocating the remaining Rs97.649 billion under KE's subsidy allocation for release before the end of June. The proposal was backed by CPPA-G and the Power Planning and Monitoring Company (PPMC), both of which stressed the importance of fully releasing the budgeted subsidies.

 

The Power Division sought ECC approval for a Rs152 billion TSG to be transferred to CPPA-G as government equity in Discos, along with the reallocation of Rs97.649 billion from KE's subsidy head to the Inter-Disco Tariff Differential account.

 

Two implementation options were presented, including releasing the full Rs97.649 billion as advance subsidy against future tariff claims or allocating part of the amount specifically to settle TESCO's Rs44.198 billion subsidy arrears.

 

During the meeting, the ECC acknowledged that KE's outstanding payments had significantly contributed to the buildup of circular debt and instructed the Power Division to actively pursue the legal case following the High Court's decision in consultation with the Ministry of Law and Justice and the Attorney General.

 

The ECC subsequently approved part of the proposal, allowing the release of Rs54.451 billion after adjusting Rs97.549 billion from the requested amount. Officials said the Power Division remains optimistic that the court will issue a decision in the KE case during the current month.