Pakistan and the International Monetary Fund (IMF) discussed reforms to the energy sector, including measures to contain rising gas-sector circular debt and shift subsidies toward targeted support for low-income consumers, officials familiar with the talks said.
The gas sector’s circular debt has reached about Rs. 3.6 trillion, with around Rs. 1.8 trillion representing principal obligations and the remainder comprising interest and late-payment surcharges, the officials said.
The IMF expressed concern over the accumulation of gas-sector debt and called for subsidies to be made more targeted, the officials said. The government and the lender discussed a proposal to provide gas subsidies directly to eligible consumers through cash transfers under the Benazir Income Support Program.
Officials briefed the IMF that the gas sector was not yet ready to implement a fully targeted subsidy mechanism because of data and ownership-related challenges. Similar discussions on shifting electricity subsidies from tariff-based support to direct BISP payments are also underway.
The government told the IMF that reforms to the gas tariff structure were aimed at controlling circular debt. The Petroleum Division also argued that lower tariffs for protected consumers had widened the gap between regulated prices and the cost of supplying gas. The two sides discussed reducing cross-subsidies in the gas sector and moving toward a tariff structure that better reflected supply costs. Earlier government plans had envisaged a multiyear strategy to address the Rs. 3.6 trillion gas-sector debt.
Fuel supply management
The IMF mission also praised Pakistan’s handling of petroleum product supplies during the regional crisis, according to officials.
Despite disruptions in the region, Pakistan did not face a shortage of petroleum products, while the government maintained supplies without imposing an additional burden on the federal budget, the officials said. The IMF’s assessment comes as Pakistan continues discussions with the lender on energy-sector reforms and subsidy policies. The IMF has previously emphasized the need to avoid broad-based energy subsidies and improve the financial viability of the sector.
Power-sector debt
The lender also questioned an increase of around Rs. 65 billion to Rs. 70 billion in the power sector’s circular debt, officials said. Power-sector circular debt stood at about Rs. 1.675 trillion at the end of June 2026, according to the briefing.
Pakistani authorities told the IMF that the power sector had performed better than program targets on recoveries and reduction of transmission and distribution losses. Officials attributed part of the increase in circular debt to lower-than-expected releases under the tariff differential subsidy. Around Rs. 95 billion less than the amount required was released under the subsidy head, according to the briefing.
The delayed payment of about Rs. 200 billion by K-Electric also contributed to the buildup in circular debt, officials said.
The IMF was satisfied with the power-sector debt position after reviewing comparable data, according to officials.
Direct cash support
Pakistan and the IMF are expected to hold further discussions on replacing tariff-based electricity subsidies with direct cash assistance for low-income consumers. Under the proposal, eligible consumers could receive support through BISP rather than benefiting from artificially lower electricity tariffs. The approach is intended to separate social protection from energy pricing while reducing distortions and helping contain circular debt.
The government and IMF are expected to work out the details of the targeted subsidy mechanism in further policy-level discussions, including identification of eligible consumers and the method of transferring assistance.
The discussions form part of Pakistan’s ongoing IMF review, which includes reforms aimed at improving the financial sustainability of the electricity and gas sectors and preventing a further buildup of circular debt.