Government Approves Rs200 Billion Power Subsidy to Contain Circular Debt Surge

Islamabad: The government has approved a Rs200 billion power subsidy to address severe cash flow issues in the electricity sector and to contain a projected Rs491 billion increase in circular debt over the next six months, officials said on Thursday.

The decision was taken by the Economic Coordination Committee (ECC) of the Cabinet, chaired by the Minister for Finance and Revenue, amid concerns over maintaining debt flows within limits agreed with the International Monetary Fund (IMF).

According to a statement issued by the Ministry of Finance, the ECC approved a supplementary grant of Rs200 billion as government investment in the equity of power distribution companies (DISCOs) to resolve liquidity constraints in the power sector. Of this amount, Rs105 billion will be provided directly by the Ministry of Finance, while the remaining sum will be met through allocations from the existing power subsidy budget.

The government had initially allocated Rs1.04 trillion for power subsidies in the current fiscal year, which was later reduced to Rs893 billion following the IMF’s second review. Despite repeated financial injections amounting to trillions of rupees annually, the performance of the power sector has remained weak.

The ECC was informed by the Power Division that circular debt remains a fundamental concern, having risen to Rs1.817 trillion by the end of October 2025, compared to Rs1.614 trillion in June. Factoring in expected power producer bills, recoveries from DISCOs, and routine tariff differential subsidies for November and December 2025, circular debt is projected to reach Rs2.105 trillion by the end of December, an increase of Rs491 billion compared to June.

Officials explained that the Rs200 billion subsidy is necessary to bring the circular debt flow within IMF-agreed limits. The IMF has directed Pakistan to cap the annual flow of circular debt at Rs300 billion, which would require keeping the stock at Rs1.914 trillion by the end of December.

The ECC was also warned that failure to make timely payments to power generation companies could further disrupt electricity supply and harm economic growth. As payments to Independent Power Producers (IPPs) are backed by sovereign guarantees, delays could trigger the invocation of guarantees and lead to higher late payment surcharges.

The Power Division maintained that the approved subsidy would help achieve circular debt flow targets. While the IMF has set a Rs400 billion ceiling on total circular debt flow for the current fiscal year, the ECC had approved a higher flow of Rs522 billion last week. The IMF has indicated that providing a Rs400 billion stock clearance subsidy could keep net circular debt growth at zero, effectively transferring the cost of system inefficiencies to the federal budget.

The IMF has urged the government to focus on improving bill recoveries, reducing line losses, encouraging private sector participation in DISCOs and GENCOs, establishing a wholesale electricity market, and addressing excess LNG inventories and circular debt in the gas sector.

In addition to the power sector decisions, the ECC approved Rs11.5 billion for various discretionary schemes of members of parliament. This included Rs6.4 billion for projects under the SDGs Achievement Programme in Punjab, Islamabad, Sindh, and Khyber Pakhtunkhwa; Rs40 million as a supplementary grant for the Ministry of Defence; and Rs5.2 billion for development schemes in Sindh and Khyber Pakhtunkhwa.

The committee also approved Rs5.8 billion for the establishment of Danish schools in Azad Jammu and Kashmir, Gilgit-Baltistan, and Balochistan, as well as for the Prime Minister’s Youth Skill Development Programme, while recommending the adoption of public-private partnership models.

Further approvals included Rs4.8 billion for payments to 945 families of missing persons, revised funding criteria for the Prime Minister’s Fan Replacement Programme to promote energy efficiency, and a revised PC-I for the construction of 104 additional family suites for parliamentarians.

During the meeting, inflation trends and food security were reviewed. Chief Economist Dr Imtiaz Ahmed briefed the committee on the macroeconomic situation, noting a significant improvement in inflation during the current fiscal year. Inflation remained low in the early months, recorded at 4.1% in July and 3.0% in August, before temporary supply disruptions caused by floods led to upward pressure in September and October. Inflation eased again to 6.1% in November, indicating improving price stability.

The ECC chair emphasized that any review of past decisions related to PTDC should align with the government’s reform agenda and the rightsizing policy for state-owned enterprises.