IMF Presses Pakistan to End Circular Debt Growth in Power Sector

The International Monetary Fund (IMF) has urged Pakistan to bring fresh inflows into the circular debt to zero during the current fiscal year, increasing pressure on the government to address one of its most serious financial issues.

According to officials familiar with the matter, inefficiencies in Power Distribution Companies (DISCOs) remain the main cause of the growing circular debt.

Losses from these companies reached Rs 265 billion in FY2024–25, slightly down from Rs 276 billion in FY2023–24. However, under-recoveries showed a noticeable improvement, falling to Rs 132 billion from Rs 315 billion in the previous year.

In technical-level discussions currently ongoing in Islamabad, the Power Division shared its reform roadmap with the IMF. The plan includes tariff rebasing, rationalization of subsidies, and debt restructuring.

A key change will be the shift in the timing of the baseline tariff adjustment from July to January, starting from January 1, 2026. In addition, NEPRA is reviewing interim tariff requests submitted by eight DISCOs for FY2025–26.

These companies are collectively seeking Rs 455 billion in revenue, which could result in a per-unit electricity price increase of Rs 2 to Rs 4, depending on NEPRA’s final approval.

Officials acknowledged that completely eliminating operational losses in DISCOs is not realistic. Still, the IMF has urged Pakistan to reduce these inefficiencies as much as possible. Any remaining financial gaps will be filled through government subsidies.

As of the end of FY25, Pakistan’s circular debt stock stood at Rs 1.614 trillion, which is a significant decrease from Rs 2.31 trillion in FY23 and Rs 2.394 trillion in FY24. Subsidies to the power sector during FY25 amounted to Rs 1.225 trillion.

To further reduce circular debt to around Rs 400 billion, the government has secured a Rs 1.2 trillion bank financing facility. However, this facility will be serviced through a surcharge of up to Rs 3 per unit, which consumers will pay over the next five years.

Despite some improvements, financial data from July to December 2024 shows a grim picture. DISCOs posted core operating losses of Rs 283.7 billion, not including government subsidies.

Among the worst performers were Quetta Electric Supply Company (QESCO) with losses of Rs 92.65 billion, Peshawar Electric Supply Company (PESCO) with Rs 53.68 billion, and Hyderabad Electric Supply Company (HESCO) with Rs 39.63 billion. Even relatively stronger companies like Multan Electric Power Company (MEPCO), Faisalabad Electric Supply Company (FESCO), and Gujranwala Electric Power Company (GEPCO) reported losses after adjusting for subsidies. QESCO alone reported an EBIT loss of Rs 60.36 billion, which worsened after accounting for subsidies.

Former Finance Ministry advisor Dr. Khaqan Najeeb pointed out that Pakistan’s average technical and commercial losses of 20 percent reflect deep-rooted inefficiencies in billing, collections, and transmission systems.

He warned that losses of around Rs 300 billion in just six months could easily grow to Rs 600 billion annually if serious reforms are not implemented.

He emphasized the need for improved governance, modern technology, and potential privatization or concession-based management to make the power sector more efficient.

Dr. Najeeb added that while temporary financial support may reduce circular debt in the short term, only deep structural reforms can solve the issue permanently.