Pakistan is pushing back against the latest demand from the International Monetary Fund (IMF) to limit the flow of circular debt in the power sector to Rs. 200 billion for this fiscal year. Officials argue that this cap is unrealistic given the ongoing financial and operational hurdles they face.
According to sources in the Power Division, the total losses for FY2025 are expected to hit Rs. 535 billion, which is significantly higher than the IMF’s proposed limit. The government estimates that inefficiencies will account for about Rs. 276 billion, while the under-recovery of electricity bills could add another Rs. 260 billion to the overall burden.
These figures were reportedly discussed during ongoing policy talks with IMF representatives, who are urging Islamabad to curb the growth of new circular debt as part of broader fiscal and energy sector reforms.
Background: Understanding Circular Debt in Pakistan
Circular debt in Pakistan describes a persistent cycle of unpaid bills within the power supply chain. Distribution companies (DISCOs) struggle to collect full payments from consumers, independent power producers (IPPs) go unpaid, and fuel suppliers face cash shortages. Consequently, the government often steps in with funds to avert energy shortages, which only adds to the fiscal strain.
As of mid-2025, Pakistan’s total circular debt has ballooned to around Rs. 1.6 trillion, despite several attempts at restructuring and settling the issue in previous years.
IMF’s Condition and Government’s Response:
The IMF has reportedly urged Pakistan to cap the annual rise in circular debt at Rs. 200 billion or less, effectively aiming for “zero inflows” in new debt. This requirement is part of the ongoing economic reform agenda linked to the country’s extended loan program.
However, government officials argue that such a strict limit is unrealistic without major economic adjustments. They’ve informed the IMF that the power sector is already grappling with structural inefficiencies, energy theft, and a limited ability for consumers to handle higher tariffs.
Officials assert that enforcing the proposed cap would either necessitate significant cuts to subsidies or a steep increase in electricity tariffs, both of which could exacerbate inflation and public dissatisfaction.
Recent Steps Toward Debt Resolution
Earlier this year, the government finalized a Rs. 1.225 trillion debt settlement plan with a group of banks to alleviate pressure on the power sector. This plan enables the government to settle outstanding payments to Independent Power Producers (IPPs), with repayments stretched over six years through a surcharge of Rs. 3.23 per unit on electricity bills.
Moreover, authorities are focusing on tariff adjustments and energy efficiency reforms to gradually minimize losses. The IMF has reportedly given Pakistan until 2031 to achieve zero circular debt accumulation, emphasizing a commitment to progressive reforms rather than an immediate fix.
To boost revenue, the government is also planning to increase the transition levy on captive power plants from 10% to 15% by January 2026 — a strategy aimed at expanding the fiscal base without placing a direct burden on domestic consumers.
Implications for Consumers and the Economy
Analysts suggest that the government’s position is a careful balancing act. They’re trying to maintain macroeconomic stability while also avoiding any public backlash that might come from potential tariff increases. Accepting the IMF’s demands could pave the way for the next loan tranche and help restore investor confidence, but it might also lead to higher electricity prices.
On the flip side, pushing back against the cap could slow down the IMF program and delay much-needed inflows, which would have a negative impact on the rupee and fiscal planning.
Energy experts emphasize that Pakistan’s circular debt problem can’t be solved with just short-term fiscal fixes. For real, sustainable improvement, there needs to be better governance of DISCOs, strict action against electricity theft, and a rational approach to subsidies.
Outlook
The upcoming round of discussions with the IMF will be crucial in determining how much leeway Islamabad can gain in managing its energy sector debt. Policymakers are likely to suggest a gradual reduction strategy instead of an immediate cap, which would better align with the current political and economic landscape.
While the IMF is pushing for tighter control over fiscal leakages, Pakistan’s main focus remains on ensuring a stable energy supply and preventing social unrest in the face of rising inflation.
For now, the standoff continues—a familiar reminder that tackling the circular debt crisis requires not just financial tweaks but also the structural reforms that Pakistan has been putting off for far too long.
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