IMF backs Pakistan’s plan to end power debt spiral by 2031

ISLAMABAD: Pakistan has won crucial backing from the International Monetary Fund for a sweeping plan to eliminate new accumulation of its power sector’s circular debt by 2031—a structural shift aimed at unwinding Rs2.4 trillion ($8.6 billion) in legacy arrears that have long crippled the country’s energy economy. Under the government’s strategy, outlined in the IMF’s latest Extended Fund Facility review, nearly 80 per cent of existing debt owed by the Central Power Purchasing Agency will be securitized into a long-term sukuk, serviced through a dedicated surcharge on electricity bills. The Debt Service Surcharge (DSS), currently capped at 10 per cent of the NEPRA-determined revenue requirement, will be uncapped via legislation by June 2025 to ensure repayment flows remain uninterrupted.

The IMF hailed Pakistan’s “strong overperformance” in curbing debt accumulation in FY25, noting arrears rose just Rs166 billion through February—well below the Rs554 billion ceiling—thanks to timely tariff hikes, better bill recoveries and falling interest expenses.

The government assured the Fund that, “Of our existing CD stock of Rs2.4 trillion (2.1 percent of GDP), we will clear, by end-FY25, Rs348 billion via renegotiation of arrears with IPPs (Rs127 billion of which will be via already-budgeted subsidy for CD stock clearance and Rs221 billion of which will be via CPPA cash flow); Rs387 billion via waived interest fees; and Rs254 billion via additional already-budgeted subsidy for CD stock clearance; Rs224 billion in non-interest-bearing liabilities will not be cleared. The remaining Rs1,252 billion will be borrowed from banks to repay all PHL loans (Rs683 billion) and to clear the remaining stock of interest-bearing arrears to power producers (Rs569 billion). The loan will be taken on at a rate favorable to that currently paid on the CD stock (a major driver of CD flow and accumulation) and annual payments will be financed through debt service surcharge (DSS) revenues over six years.”