ISLAMABAD: After finalising the mechanism to eliminate circular debt in the power sector — by borrowing Rs1,275 billion from 18 banks, to be recovered from consumers through a debt service surcharge of Rs3.23 per unit in tariffs over the next seven years — the Task Force on Power has now turned its attention to resolving the ballooning gas sector circular debt, which has reached Rs2,800 billion.
“Similar to the power sector, end gas consumers will have to bear the burden of clearing the Rs2,800 billion circular debt through various proposed measures,” senior government officials told The News on Monday.
“Among the proposals under consideration is the imposition of a Special Petroleum Levy in the range of Rs3 to Rs10 per litre — similar to the debt service surcharge electricity consumers currently pay. This levy would be used to repay loans borrowed from commercial banks to retire the gas sector circular debt over six to seven years.”
In addition, gas prices are proposed to increase further, and the current cross-subsidy of Rs160 billion is expected to be phased out by January 2027. According to officials, “Through this combined formula, the gas sector circular debt will be addressed.”
The Task Force, comprising Lt-Gen (R) Zafar Iqbal, Adviser to the Prime Minister on Privatisation Muhammad Ali, and technical experts from CPPA, SECP, and NEPRA, has begun working on solutions to end the circular debt in the gas sector. Senior officials of the Petroleum Division also attended the recent meetings.
The second meeting of the Task Force was held on Monday (July 21, 2025) at the Petroleum Division and was attended by Petroleum Minister Ali Pervaiz Malik. “Of the Rs2,800 billion gas circular debt, Rs2,000 billion constitute the principal debt, while Rs800 billion have accumulated in the form of Late Payment Surcharge (LPS) and interest,” officials explained. “The Rs800 billion component may be addressed by waiving part of the LPS between oil and gas entities, while the rest will be settled through direct payments.”
However, they added, the primary challenge lies in addressing the Rs2,000 billion principal amount, which may be tackled by borrowing from commercial banks. This debt would then be repaid over seven years through a special levy imposed on petroleum product prices.
“For example, if Re1 per litre is levied, the government could raise Rs18 billion annually. At Rs2 per litre, the revenue would be Rs38 billion; Rs3 per litre would generate Rs54 billion; and at Rs10 per litre, the government could collect Rs180 billion per year.”
“If the government borrows Rs2,000 billion and plans to repay it over seven years, Rs250 billion will need to be arranged annually. In addition to the special levy—depending on what the task force ultimately proposes—an increase in gas prices would also be necessary.”
Officials also said that a cross-subsidy of Rs160 billion is currently provided to four categories of protected consumers and the first four slabs of unprotected consumers. This subsidy stood at Rs160 billion in FY 2024-25 and has reduced to Rs140 billion in FY 2025-26.
“The government is obligated to end cross-subsidies in the gas sector by December 2026 under a structural benchmark of the $7 billion IMF loan programme. Eliminating this subsidy will further necessitate an increase in gas tariffs.”
They added that the average cost of gas currently stands at Rs1,890 per MMBtu. If all categories of consumers were charged this uniform rate, the circular debt would not re-emerge. However, implementing such a politically sensitive reform—passing on the average cost to all consumers—may prove difficult for an elected government.
Officials said that the phased reduction in the cross-subsidy would begin in January 2026, continue through July 2026, and be fully eliminated by December 2026. From January 2027 onward, a targeted subsidy system may be introduced, potentially using data from the Benazir Income Support Programme (BISP).
When asked whether, after the task force resolves the issue of circular debt in the gas sector, the inefficient gas companies would continue to operate as usual—or whether they would be privatised following the unbundling of distribution and transmission systems, or limited to charging only transmission and distribution fees while the business of purchasing and selling gas is handed over to the private sector, a top official responded that the task force will decide the future structure of the gas utilities to ensure that circular debt does not re-emerge.