Amid warnings of a sharp rise in the country’s power sector liabilities, a key cabinet committee has cleared a Rs 200 billion subsidy package aimed at containing the growth of circular debt within limits set under Pakistan’s agreement with the International Monetary Fund (IMF).
The decision was taken by the Economic Coordination Committee (ECC) after officials projected that circular debt could climb by nearly Rs 491 billion within six months if corrective measures were not taken. Data shared with the committee showed that circular debt had reached Rs 1.817 trillion by the end of October, compared to Rs 1.614 trillion in June.
According to a statement issued by the Ministry of Finance, the ECC approved a supplementary grant of Rs 200 billion as government investment in the equity of power distribution companies (DISCOs) to ease cash flow pressures in the electricity sector. Of this amount, Rs 105 billion will be provided directly by the finance ministry, while the remaining funds will be adjusted from the power sector’s existing subsidy allocation.
For the current fiscal year, the government had initially earmarked Rs 1.04 trillion for electricity subsidies, though this was later reduced to Rs 893 billion following the IMF’s second programme review.
Despite repeated financial injections, the power sector continues to struggle. Officials from the Power Division told the ECC that, based on projected payments to power producers, expected recoveries from DISCOs and routine tariff differential subsidies for November and December, the circular debt stock could swell to Rs 2.105 trillion by the end of December.
This would exceed June levels by Rs 491 billion, well above the IMF’s requirement to limit additional circular debt flow to Rs 300 billion, which corresponds to a target stock of about Rs 1.914 trillion by the end of the month. The projected increase represents a 35 per cent rise compared to June.
The committee was cautioned that delays in payments to power producers could disrupt electricity supply and weigh on economic activity. Since many independent power producers (IPPs) operate under government-backed guarantees, late payments also raise the risk of guarantee calls and additional surcharge penalties.
Power sector officials maintained that the Rs 200 billion injection would help meet IMF-agreed targets. Outstanding dues to IPPs have already climbed to Rs 1.07 trillion by October, up by Rs 228 billion since June, placing further strain on their ability to service debt and maintain fuel supply chains.
While the IMF has set an annual circular debt flow ceiling of Rs 400 billion for the current fiscal year, the ECC last week approved a higher target of Rs 522 billion. The Fund has warned that stock-clearing subsidies effectively shift the burden of inefficiencies onto the federal budget and stressed the need for structural reforms, including improved bill recovery, reduced line losses, private sector participation in DISCOs and GENCOs, progress toward a wholesale power market, and solutions for gas sector imbalances.
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