Meeting scheduled for 15-16th: PD to brief IMF on CDMP, subsidy and carbon levy law
ISLAMABAD: The Power Division is all set to brief the International Monetary Fund (IMF) virtually on circular debt development, annual rebasing outlook, power sector subsidy size and composition and carbon levy legislation on May 15-16, 2025. Prime Minister Shehbaz Sharif's government has made a series of new commitments to the IMF focused on reforming Pakistan's energy sector — including both power and gas.
These commitments include regular tariff increases, transferring circular debt to the Central Power Purchasing Agency (CPPA-G), and a complete halt on introducing new subsidies for electricity or gas.
The government assured the IMF that subsidy on electricity and gas will be harmonized with Benazir Income Support Programme (BISP) so that the facility is extended only to the deserving consumers.
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The government will closely work with the IMF and World Bank to identify and verify consumers to be targeted under the new subsidy framework by end-January 2026; define eligibility criteria by end-July 2026; have a rebate mechanism in place with financial institutions by end-July 2026; and begin to roll out communications campaign around this by end-June 2025.
According to the Circular Debt Management Plan (CDMP) shared with the IMF, Islamabad has promised timely electricity tariff increases consistent with cost recovery.
NEPRA will continue with timely automatic notifications of regular quarterly tariff adjustments (QTAs) and monthly fuel cost adjustments (FCAS) to capture any gaps between the base tariff and actual revenue requirements that arise during the year, to prevent CD flow. And pledged to ensure the full implementation of the July 2025 annual rebasing (new SB, July 1, 2025), QTRs, and FCAs going forward. All provinces agree not to introduce any subsidy for electricity or gas.
On the issue of reduction in circular debt, it has been promised to reduce the financial burden on the power sector by converting the existing CD stock to CPPA debt.
The Power sector's existing CD stock is of Rs2.4 trillion (2.1 percent of GDP) which will be clear by end-FY25, Rs348 billion via renegotiation of arrears with IPPs (PRs127 billion of which will be via already-budgeted subsidy for CD stock clearance and PRs221 billion of which will be via CPPA cash flow); Rs387 billion via waived interest fees; and Rs254 billion via additional already-budgeted subsidy for CD stock clearance.
Rs224 billion in non-interest-bearing liabilities will not be cleared.
The remaining Rs1.252 trillion will be borrowed from banks to repay all PHL loans (Rs683 billion) and to clear the remaining stock of interest-bearing arrears to power producers (Rs569 billion).
The loan will be taken on at a rate favourable to that currently paid on the CD stock (a major driver of CD flow and accumulation) and annual payments will be financed through Debt Service Surcharge (DSS) revenues over six years.
The DSS will be set at 10 percent of the NEPRA-determined revenue requirement, adjusted each year at the time of annual rebasing, per current practice. In the event that DSS revenues fall short of the annual payment requirement, the DSS will be increased to make up for the shortfall and calibrated as per any anticipated future shortfalls in the succeeding year. To facilitate this, the government will adopt legislation to remove the 10 percent DSS cap by end-June 2025 (new end-June 2025 Structural Benchmark). There will be no fiscalisation of any revenue shortfall.
The government has prepared a plan to retire, in a timely way, the interest-bearing CD stock anticipated at the end of FY25 (expected to be no greater than Rs337 billion, a result of gross flows this year), alongside the FY26 budget process, which will not utilise subsidy resources. With one of the primary drivers of CD flow-interest charges on delayed payments to IPPs significantly reduced, CD targets have been set lower. These targets will continue to decline to zero by FY31, the end of the operation.
The Power Division will also share update on EV charging stations by end February 2027, adding that to incentivise private sector investment in EV charging stations, the government will adopt a Viability Gap Funding (VGF) framework that: (i) provides one-off subsidies; (ii) ensures sufficient competition through an open bidding process and includes clear criteria to evaluate the eligibility of projects for gap funding; and (iii) implements the first bid window.
Finance Ministry has informed the Power Division that the allocation of power sector subsidies for the fiscal year 2025-26 will depend on the availability of fiscal space, well-informed sources in the Finance Division told Business Recorder. In a letter titled 'MEFP for EFF 2024-27 – Circular Debt (CD) Target for FY 2025-26,' the Power Division had sought indicative allocations for the upcoming fiscal year to bridge the circular debt gap. According to the Corporate Finance Wing of the Finance Division, budgetary allocations for the power sector in FY 2025-26 will be finalized through the standard budgetary process in consultation with the Budget and CF Wings of the Finance Division, keeping in view the prevailing fiscal constraints.
Copyright Business Recorder, 2025
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