Pakistan and the International Monetary Fund (IMF) are discussing changes to the country’s energy subsidy system, including a possible shift from tariff-based relief to direct cash assistance for low-income households through the Benazir Income Support Programme (BISP). The proposal is being considered as part of wider discussions aimed at improving the financial position of the gas and electricity sectors and preventing further accumulation of circular debt.
Officials familiar with the discussions said the IMF has pushed for energy subsidies to be directed more specifically toward households that need financial support rather than being provided through broad tariff reductions. Under the proposal being examined for the gas sector, eligible households could receive subsidies directly through BISP. The approach would separate welfare support from energy pricing while allowing tariffs to more closely reflect the underlying cost of supplying gas.
The discussions come as gas-sector circular debt has reached around Rs3.6 trillion. Officials said approximately Rs1.8 trillion of this amount represents principal, while the remaining amount consists of interest and late-payment surcharges. The size of the accumulated debt has increased pressure on the government to introduce measures that can address the financial imbalance in the gas sector and prevent the stock from continuing to grow.
Pakistani authorities, however, have raised concerns about immediately introducing a fully targeted gas subsidy system. Officials cautioned that the gas sector currently does not have the required data and clearly defined ownership arrangements needed to identify beneficiaries and operate such a mechanism effectively. As a result, discussions are continuing over the practical requirements for shifting from tariff-based support to direct transfers.
A similar discussion is already underway for the electricity sector, where Pakistan and the IMF are considering replacing lower electricity tariffs for eligible consumers with direct payments through BISP. Under such a system, qualifying households would receive financial assistance directly instead of benefiting from artificially reduced electricity rates. The proposed structure is intended to keep social protection spending separate from energy pricing and reduce distortions in the tariff system.
The government also briefed the IMF on recent gas tariff changes and argued that the revisions are necessary to bring the sector’s accumulated debt under control. The Petroleum Division maintained that lower rates for protected consumers have kept regulated gas prices significantly below the actual cost of supplying the commodity. According to officials, this difference between the cost of supply and regulated prices has contributed to the financial shortfall and the accumulation of circular debt.
The discussions also included the possibility of reducing cross-subsidies and moving toward a pricing structure that more closely reflects supply costs. Pakistan had previously outlined a multiyear approach to reduce the approximately Rs3.6 trillion gas-sector debt burden. The IMF has repeatedly called for Pakistan to avoid broad energy subsidies and improve the financial sustainability of the gas and power sectors.
During the talks, the IMF also acknowledged Pakistan’s ability to maintain petroleum supplies during recent regional disruptions, according to officials. Despite the disruption, petroleum products continued to reach the domestic market without shortages, while the federal budget did not have to absorb additional costs to maintain supplies. The development was discussed as part of the broader review of the country’s energy-sector performance.
The electricity sector was another major area of discussion, with the IMF seeking clarification regarding an increase of around Rs65 billion to Rs70 billion in circular debt. The power-sector circular debt stood at approximately Rs1.675 trillion at the end of June 2026, according to the briefing. Pakistani officials explained that the sector had exceeded programme targets relating to bill recoveries and had also made progress in reducing transmission and distribution losses.
Officials attributed part of the increase in electricity-sector debt to the tariff differential subsidy. They said approximately Rs95 billion less than the required amount had been disbursed under the subsidy arrangement. Officials also pointed to a payment of around Rs200 billion that K-Electric had delayed as another factor affecting the sector’s financial position. After reviewing comparable figures and the explanations provided by Pakistani authorities, the IMF was said to be satisfied with the position of power-sector debt.
Further discussions are expected on the proposal to replace subsidised electricity tariffs with direct payments to low-income households. Under the proposed arrangement, eligible families would receive assistance through BISP rather than benefiting from lower electricity rates. The proposed model could allow energy prices to operate more closely according to underlying costs while providing targeted financial assistance to households identified as eligible.
The details of the proposed cash-transfer mechanism have yet to be finalised. Issues including the identification of eligible beneficiaries, the method of transferring funds and the administrative responsibilities involved will be addressed through further policy-level negotiations. The discussions form part of the ongoing IMF review, which includes measures aimed at improving the financial sustainability of Pakistan’s gas and electricity sectors and limiting the creation of additional circular debt.
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