IMF cuts Pakistan’s FY27 power subsidy allocation to 0.6% of GDP

The International Monetary Fund has reduced Pakistan’s projected power subsidy allocation for FY2026-27 from 0.7% of GDP to 0.6% following lower circular debt flow and improvements in operational performance in the power sector.

According to the IMF’s latest review under the Extended Fund Facility and Resilience and Sustainability Facility, the FY27 circular debt flow target has been fixed at ₨300 billion, ₨100 billion lower than FY26.

The Fund said Pakistan’s FY27 budget would include power subsidies capped at ₨830 billion, or 0.6% of GDP, covering tariff differentials for distribution companies and K-Electric, payments related to former FATA areas, agricultural tube-wells and circular debt stock payments.

The IMF said timely intra-year tariff adjustments had helped maintain cost recovery and stressed that such revisions should continue amid global fuel price shocks to avoid renewed circular debt accumulation.

The report noted that tariff reductions for industrial consumers in February were offset through increased or newly introduced fixed charges for residential consumers, including some protected categories.

The Fund urged the government to preserve the progressive tariff structure while improving subsidy targeting for vulnerable consumers.

The IMF also said privatisation of distribution companies would proceed alongside broader reforms, with preconditions set as an end-December 2026 structural benchmark.

According to the report, transmission network restructuring has been finalised and wholesale electricity auctions are expected to begin by mid-2026.

The Fund also referred to Nepra’s shift from net metering to net billing for solar consumers, saying the move would better balance solar and grid consumption, although exemption of existing users would continue near-term cross-subsidies.

The IMF noted that rising solar adoption, driven by higher electricity tariffs, lower solar panel prices and generous export rates, had contributed to weaker electricity consumption and financial pressure in the sector.

Pakistani authorities informed the Fund that settlements with several independent power producers under the circular debt reduction plan would be completed by end-June 2026, while efforts to resolve a dispute involving K-Electric would continue until end-September 2026.