Energy reforms: Familiar tools, new promises
The IMF's First Review under the SBA and approval of Pakistan's Climate Resilient Sustainability Facility (RSF) both place the country's energy sector squarely in focus. From petroleum and electricity to gas, the reform roadmap is extensive — but deeply familiar in approach.
Some reforms are front-loaded with structural benchmarks; others are deferred to the distant end of the program. In the near term, the emphasis remains on revenue extraction, circular debt containment, and tariff rationalizationon — all of which rest heavily on consumer shoulders.
Consider the Circular Debt Management Plan. The plan seeks to convert up to 80 percent of the circular debt stock — currently CPPA payment arrears — into new CPPA debt via a sukuk. This financial engineering is expected to significantly lower the interest burden, given sukuk's lower yields. The IMF points out that nearly half of recent circular debt flows have come from interest charges on arrears — and this conversion would ostensibly free up fiscal space, reduce the need for subsidies (a third of which are used for debt clearance), and stabilize the system.
But the real story is that consumers are being asked to foot the bill through a fixed debt service surcharge (DSS) of Rs3.23/unit over six years, expected to yield close to Rs2 trillion.
For this to succeed, the government must also remove the existing DSS cap by June 2025 — a structural benchmark under the RSF. One might call this reform, but it's more accurately a transfer of inefficiency costs to end-users, while structural fixes to theft, line losses, and governance continue to get lip service, not benchmarks.
On petroleum, the front-loaded benchmark is clearer: a Rs5/litre carbon levy on gasoline and diesel, to be legislated under the FY26 Finance Act. This levy is essential to unlock the September RSF tranche and will be gradually phased in. It extends the Petroleum Development Levy (PDL) scope to fuel oil as well — and future finance acts may hike it further. Given the rather aggressive climate financing needs outlined in the report, the IMF has not gone too hard in terms of carbon levies. The forecasted Rs1.3 trillion in lieu of Petroleum Levy revenues for FY26 would not require a substantial increase from existing rates.
Part of the additional PDL — Rs10/litre — will finance a limited electricity subsidy of Rs1.7/unit for non-lifeline consumers, running through FY26. Another Rs0.90/unit relief will come from the captive power plant (CPP) transition levy. This brings much-needed clarity on the electricity tariff relief, particularly addressing recent questions around whether the Rs1.7/unit reduction — currently in effect this quarter — is a temporary or permanent measure.
The bigger reform narrative — revamping the subsidy architecture — is deferred. The IMF rightly points out that Pakistan's current system is distortionary, often benefiting wealthier consumers and promoting overconsumption. The long-term plan is to eliminate cross-subsidies and replace them with targeted, cash-based subsidies via BISP, starting in FY27. Initial consumer verification is planned by January 2026, followed by eligibility criteria by July 2026, and rebates to be launched by January 2027. This is sound in theory — and if done well, could be transformative. But it is neither prioritized nor benchmarked for the current fiscal cycle.
Efficiency, too, gets a nod — in the form of minimum energy performance standards (MEPS) for appliances. By end-June 2027, compliance targets have been set for fans, LEDs, refrigerators, air conditioners, and motors. But again, these goals are tied to the program's final stages and will likely be overshadowed by more immediate revenue-focused reforms.
Meanwhile, critical areas like privatization of discos and gencos, resolution of transmission bottlenecks, and addressing systemic theft and losses continue to be acknowledged — but are not attached to performance criteria or disbursement conditions. They remain second-order priorities in the reform matrix.
As has often been the case, the more straightforward measures — such as increasing levies and introducing surcharges — are being prioritized and framed as reform. While there has been some movement on addressing the deeper institutional, technical, and governance-related inefficiencies in Pakistan's energy sector, progress remains gradual. Consumers are once again being asked to shoulder more of the burden, even as core structural challenges persist. Whether this round of reforms will deliver more lasting results than previous efforts will ultimately depend, as always, on sustained political commitment.
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