Govt to adjust K-Electric subsidy funds to cut circular debt stock

The federal government is set to reallocate funds from K-Electric’s tariff differential subsidy head to support power sector liquidity and meet circular debt targets agreed under the International Monetary Fund programme, Business Recorder reported. 

The move comes as the government has committed under the Memorandum of Economic and Financial Policies to reduce the circular debt stock to Rs1.6 trillion by June 30, 2026.

The Ministry of Energy (Power Division) informed the Economic Coordination Committee on June 24, 2026, that circular debt had reached Rs1.924 trillion by May 31, including Rs873 billion payable to banks under circular debt financing. The remaining liabilities include payments due to power producers, the National Grid Company and other entities.

The Power Division warned that rising payables had become unsustainable and were creating pressure for Independent Power Producers in meeting debt obligations and maintaining supply chains. It said delayed payments could affect electricity supply, increase the risk of sovereign guarantee calls and add late payment surcharges.

The committee was informed that Rs893 billion had been allocated for power sector subsidies in the current fiscal year. Of this, Rs257 billion was earmarked under Finance Division Demand No. 45 for payments to government power plants and Independent Power Producers as government equity. So far, Rs105 billion has been released, while Rs152 billion remains to be disbursed to CPPA-G before the fiscal year closes.

The Power Division said the proposed Technical Supplementary Grant was not additional fiscal support, but was meant to reduce the circular debt stock in line with the Circular Debt Management Plan 2025-26 and International Monetary Fund commitments.

The Power Division said the company had not cleared electricity dues, contributing around Rs200 billion to circular debt accumulation. Since KE’s tariff matter is sub judice, the division proposed reappropriating surplus funds under KE’s tariff differential subsidy head to meet sector cash flow needs.

The division proposed reappropriation and release of Rs97.649 billion from KE tariff differential subsidy in June 2026 to the Inter-DISCO Tariff Differential head.

Two options were placed before the Economic Coordination Committee: release the full Rs97.649 billion as advance subsidy against future tariff differential claims, along with adjustment of TESCO’s Rs44.198 billion tariff differential subsidy arrears against outstanding subsidy advances; or release Rs53.451 billion as advance subsidy and Rs44.198 billion specifically for TESCO arrears.

During the discussion, the committee was told that KE’s non-payment had significantly added to circular debt. The forum directed the Power Division to pursue the legal case after the High Court’s decision in consultation with the Ministry of Law and Justice and the Attorney General. The Power Division said the case would be actively pursued from July 2026.

The Minister for Petroleum also informed the committee that KE had been served disconnection notices for breach of guarantees. The committee advised the Petroleum and Power Divisions to resolve the matter on priority.

The Economic Coordination Committee considered the Power Division’s June 16, 2026, summary on the release of Rs152 billion as equity in power distribution companies and reappropriation of available budget. It partially approved the proposal, allowing Rs54.451 billion after adjusting Rs97.549 billion from the total Rs152 billion.