Power sector subsidies likely to fall 20% to Rs 830 billion in FY27 budget

The federal government is expected to reduce power sector subsidies to Rs830 billion in the federal budget for 2026-27, down around 20% from Rs1.036 trillion allocated for 2025-26 and 7% lower than the revised allocation of Rs893 billion, Business Recorder reported, citing sources.

The proposed allocation follows the International Monetary Fund’s (IMF) decision to lower the power subsidy ceiling from 0.7% to 0.6% of GDP for FY2026-27.

The IMF staff report, released on May 15, 2026, said that the next budget will cap power subsidies at Rs830 billion after the circular debt stock reduction operation in FY2025-26 and the subsidy would cover tariff differential for Discos and K-Electric, current and arrears payments for FATA, agricultural tube-wells and circular debt stock payments to offset expected flows.

Sources said the Tariff Differential Subsidy (TDS) for Discos and K-Electric is projected at Rs374.136 billion for FY2026-27, compared with Rs411 billion in FY2025-26, reflecting a reduction of about 9%.

However, TDS for K-Electric alone is expected to rise to Rs163 billion in FY2026-27 from Rs126 billion in FY2025-26, showing an increase of more than 26%.

Allocations under some heads are expected to remain almost unchanged, with Rs248 billion projected for FY2026-27 against Rs249.136 billion in FY2025-26, a marginal reduction of 0.5%.

Out of the total projected subsidy of Rs830 billion, around Rs419 billion is expected to be allocated for merged districts of Khyber Pakhtunkhwa, formerly FATA, TDS for Azad Jammu and Kashmir, and the Pakistan Energy Revolving Account (PERA).

PERA was established to facilitate payments to Chinese independent power producers (IPPs) under the China-Pakistan Economic Corridor (CPEC).

Funds are also expected to be earmarked for outstanding receivables of Chinese IPPs, estimated at around Rs550 billion.

On May 31, 2026, Minister for Power Sardar Awais Ahmad Khan Leghari said at a press conference that the government had reduced power subsidies by Rs475 billion, from Rs1.287 trillion in FY2024-25 to the projected Rs830 billion for FY2026-27.

The government is required under its agreement with the IMF to cap circular debt at Rs1.614 trillion by June 2026, with zero growth in its flow.

Circular debt currently stands at more than Rs1.7 trillion, meaning allocations will be needed in the upcoming budget to meet the agreed target.

The IMF has also pushed the government to move away from untargeted cross-subsidies and shift towards direct, targeted cash transfers for low-income consumers through the Benazir Income Support Programme (BISP).

An official said the government had already removed a financial burden of Rs250 billion from industrial consumers.

Industries are now seeking the removal of the remaining cross-subsidy of around Rs100 billion, which would need to be absorbed by other consumer categories if approved.