IMF urges Pakistan to prioritize structural reforms
TO ADDRESS POWER SECTOR CIRCULAR DEBT
PSMU Desk
ISLAMABAD: The International Monetary Fund (IMF) has called on Pakistan to accelerate efforts to tackle the long-standing issue of circular debt (CD) in the power sector, urging a shift toward comprehensive structural reforms. These reforms, according to the IMF, should go beyond previous strategies focused solely on containment and work to address the root financial distortions affecting the sector.
In its staff report for the second review under the Extended Fund Facility (EFF), the IMF acknowledged that the restructuring of Rs 1.225 trillion in power sector debt had significantly improved liquidity, relieved fiscal pressures, and cleared historical financial obligations—without imposing additional burdens on consumers. This restructuring has created room for social spending and reduced the strain on the national budget.
The Pakistani Cabinet recently approved a three-year incremental pricing scheme aimed at increasing demand for electricity from industrial and agricultural users. Under this plan, tariffs for consumption above a designated baseline will be set at Rs 22.98/kWh. However, the plan ensures that no particular industry or sector will receive preferential treatment. A review mechanism is in place to adjust the pricing model if incremental consumption from these sectors exceeds a 25% increase over baseline levels.
Periodic assessments of this pricing scheme will ensure that revenue aligns with costs, and any shortfall in revenue due to insufficient tariff adjustments will be offset by higher tariffs for industries and agriculture. The scheme will expire after three years, with no possibility for extension, and will be terminated immediately if tariff hikes are required in two consecutive reviews.
The IMF stressed that the next phase of reforms must focus on improving the financial health of power distribution companies (DISCOs) by enhancing their collection rates, reducing technical and commercial losses, and implementing cost-reduction measures. Additionally, it emphasized the importance of increasing private sector involvement in both DISCOs and generation companies (GENCOs), as well as establishing a competitive wholesale electricity market. Tackling the surplus of re-gasified liquefied natural gas (RLNG) and reducing circular debt in the gas sector were also highlighted as essential steps for reform.
In the report, the IMF noted that government initiatives to encourage captive power producers (CPPs) to shift to the national grid have been successful, with industrial power consumption rising by 35% year-on-year from April to August 2025, partially offsetting broader weaknesses in overall electricity demand.
As Pakistan seeks to implement these reforms, the IMF emphasized that sustained progress is essential for the country to strengthen its energy sector and ensure fiscal stability in the long term.
