The International Monetary Fund has warned Pakistan against reducing consumer gas prices, arguing that downward tariff revisions could add to the country’s already substantial gas sector circular debt. The issue was raised during the IMF’s reviews of Pakistan’s Extended Fund Facility and Standby Arrangement, with the government subsequently taking steps to restrict its ability to reduce gas tariffs outside the established regulatory process. Under commitments made during the programme, consumer gas prices are expected to be revised in accordance with determinations made by the Oil and Gas Regulatory Authority.
The government amended the Oil and Gas Regulatory Authority Ordinance in March 2022 following discussions around the authority’s tariff setting powers. The changes were aimed at limiting the government’s ability to reduce tariffs determined by the regulator. Pakistan also committed to following the established mechanism for revising consumer gas prices based on Oil and Gas Regulatory Authority determinations. The arrangement is intended to prevent tariff differences from accumulating and creating additional financial pressure across the gas supply chain.
Pakistan’s gas sector operates through a different financial mechanism from the power sector. While the government generally budgets subsidies to cover differences between electricity tariffs and costs in the power sector, gas prices have historically relied to a significant extent on a cross subsidy mechanism. Under this arrangement, higher tariffs paid by certain consumer categories can help support lower prices for vulnerable residential consumers. Any reduction in tariffs without an equivalent mechanism to cover the resulting financial gap can therefore create additional pressure on gas companies and contribute to the accumulation of unpaid liabilities.
Under the existing regulatory framework, the Oil and Gas Regulatory Authority determines wellhead gas prices and the revenue requirements of Sui gas companies twice each year. Following these determinations, the federal government has a period of 40 days to provide its advice before consumer gas prices are officially notified. The mechanism is intended to provide a structured process for determining tariffs while taking into account the revenue requirements of gas distribution companies and the cost of supplying gas to consumers.
However, the regular adjustment of consumer gas prices according to regulatory determinations was discontinued after being followed until fiscal year 2013. The suspension of this practice contributed to the accumulation of tariff differences within the gas sector. One of the factors behind the growing gap was the diversion of re-gasified liquefied natural gas to the domestic sector without a firm mechanism to ensure that its full cost was recovered through consumer tariffs. Over time, these differences added to the financial obligations carried by the gas sector.
The scale of the problem has become significant. Gas sector circular debt stood at Rs3,288 billion as of June 30, 2025, including Rs1,468 billion in accumulated interest costs. The size of the liability has made gas sector reforms an important component of Pakistan’s discussions with international financial institutions. Under the IMF programme, Pakistan agreed to establish a clear definition of gas circular debt, verify the outstanding stock, introduce monthly reporting and develop a formal plan for managing and reducing the accumulated debt.
The circular debt management plan includes regular adjustments in end user gas prices according to established formulas. The plan also calls for measures aimed at reducing costs and lowering unaccounted for gas losses. These measures are intended to improve the financial position of the gas sector by ensuring that tariffs more accurately reflect underlying costs and by reducing losses that weaken the revenues of gas distribution companies.
The World Bank has also provided assistance to the Petroleum Division in developing a definition of gas circular debt and establishing a debt reporting system. A standardised definition and reporting mechanism can help authorities track the accumulation of liabilities more consistently and identify the sources contributing to the debt. Monthly reporting under the IMF programme is also expected to provide greater visibility into changes in the sector’s financial position.
The impact of gas sector circular debt extends beyond gas distribution companies. State owned exploration and production companies, including Oil and Gas Development Company, Pakistan Petroleum and Government Holdings Private Limited, have also been affected by the growing financial pressures in the sector. Lower collections by Sui gas companies have contributed to higher receivables owed to these exploration and production entities, reducing their financial capacity to invest in additional exploration and production activities.
The financial pressure on the gas sector is further complicated by problems in Pakistan’s power sector. Delays and weaknesses in collections across both sectors can contribute to the accumulation of receivables and restrict the ability of state owned energy companies to maintain investment. Reduced investment in exploration and production can eventually create additional challenges for domestic energy availability and increase reliance on imported energy resources.
The government has separately prepared a petroleum sector reform plan that includes a proposal to address Rs1,493 billion in circular debt over a five year period. The proposal was presented to the prime minister in December 2025 and forms part of broader efforts to improve the financial sustainability of Pakistan’s petroleum and gas sectors. Settling the accumulated liabilities, however, would need to be accompanied by reforms that prevent the debt from rebuilding through persistent tariff gaps, losses and collection shortfalls.
The IMF’s position highlights the tension between keeping energy prices affordable for consumers and maintaining the financial sustainability of the gas sector. Lower tariffs may provide immediate relief to consumers, particularly households facing higher energy expenses, but reductions that are not supported by adequate funding can increase the gap between the cost of gas and the revenue collected from consumers. That gap can eventually appear as additional receivables and unpaid liabilities within the energy chain.
For Pakistan, controlling gas circular debt will therefore require more than periodic tariff decisions. Regular implementation of the established pricing mechanism, improved recovery, reduction in unaccounted for gas losses and stronger financial reporting will remain important elements of the reform process. The government will also need to balance consumer affordability with the financial requirements of gas companies and the broader energy supply chain.
The IMF warning comes as Pakistan continues implementing reforms under its international financing programmes and attempts to improve the financial condition of the energy sector. With gas sector circular debt already reaching Rs3,288 billion by June 2025, the regulator’s tariff determinations and the government’s response to them will remain important for preventing further accumulation of liabilities. The government’s ability to maintain a predictable pricing mechanism while addressing the concerns of consumers and energy companies will be central to efforts to improve the long term financial sustainability of Pakistan’s gas sector.
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