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The current government has assured the International Monetary Fund (IMF) that it will reduce the circular debt in the gas and electricity sectors to zero by the end of this year.
As of January 2025, the circular debt in the power sector stood at Rs 2,444 billion, while in the gas sector, it amounted to Rs 2,294 billion as of June 2024. These figures represent 2.1% and 2.2% of the Gross Domestic Product (GDP), respectively.
This commitment was made by the Prime Minister during technical and policy-level discussions with the IMF, held in Islamabad from February 24 to March 14, as part of the ongoing reforms in the energy sector.
According to sources, the federal government plans to transfer the circular debt in the electricity sector to the Central Power Purchasing Agency (CPPA) through regular tariff hikes. Additionally, Prime Minister Shehbaz Sharif’s government has pledged not to introduce any new subsidies on electricity or gas.
Sources within the Ministry of Finance have stated that the ongoing reforms aimed at reducing expenditures in the energy sector are viewed as the only viable path toward long-term sustainability and lower tariffs. The new energy strategy is designed not only to curb the growth of circular debt but also to implement structural measures that maintain a balance between sustainability in the energy sector and protection for consumers, particularly vulnerable groups.
These efforts have already shown results, with the first half of fiscal year 2025 witnessing an improvement of Rs 450 billion—exceeding projections—due to reduced financing costs and better recoveries.
Officials have assured the IMF that electricity tariffs will be aligned with actual costs, financial risks will be minimized, debt sustainability will be ensured, and a business-friendly environment will be promoted. The government’s objective is to halt any increase in circular debt by the end of fiscal year 2025 and to maintain this goal through fiscal year 2026.
As part of the circular debt management plan, the government has committed to timely increases in electricity tariffs to ensure full cost recovery. Quarterly Tariff Adjustments (QTA) and Monthly Fuel Cost Adjustments (FCA) will continue to be automatically notified by NEPRA to reduce the gap between actual generation costs and base tariffs. The government has also pledged to fully implement annual rebasing, QTA, and FCA by July 2025. Furthermore, all provinces have agreed not to introduce any new subsidies on electricity or gas.
At present, the circular debt in the power sector amounts to Rs 2.4 trillion. Of this, Rs 348 billion will be settled through negotiations on outstanding payments with Independent Power Producers (IPPs), including Rs 127 billion from pre-budgeted subsidies and Rs 221 billion from CPPA’s cash flows. An additional Rs 387 billion will be addressed through interest waivers, and Rs 254 billion through supplementary budgetary subsidies. However, Rs 224 billion in non-interest liabilities will remain uncleared.
The remaining Rs 1.252 trillion will be managed through bank loans. These funds will be used to repay all loans owed by the Power Holding Company (Rs 683 billion) and the interest-bearing liabilities of IPPs (Rs 569 billion). The loans will be obtained at a lower interest rate and repaid over six years through the Debt Service Surcharge (DSS), which will be set at 10% of NEPRA’s annual revenue. If DSS revenue proves insufficient to meet repayment obligations, it will be increased accordingly. The government also plans to legislate the removal of the DSS cap by June 2025.
In the fiscal year 2026 budget, a reduced allocation is expected for electricity subsidies, as ongoing reform measures are anticipated to lower overall costs. Officials have indicated plans to further accelerate the reform process and resolve fundamental issues in cooperation with the World Bank, the Asian Development Bank, and other development partners.
