Next week's policy round of the IMF review is expected to settle a reform that Pakistan has discussed for years: replacing tariff-based electricity subsidies for poor households with direct cash transfers through the Benazir Income Support Programme. According to Business Recorder and Dawn, both sides expect to finalise the practical modalities, including how eligible consumers are identified and how money reaches them. The same reports say the gas sector, where a similar shift has been explored, is "far from ready".
The direction is right. Moving social protection out of the tariff and into BISP is the cleanest way to stop cross-subsidies from distorting what every other consumer pays. But it is worth being precise about what this reform touches. On the figures discussed with the Fund this week, the growth in power-sector circular debt over the last fiscal year was driven by subsidy disbursements and the K-Electric dispute, not by the protected-consumer slabs. Targeting the subsidy better will improve fairness and price signals. On its own, it will not move the Rs1.675 trillion stock.
What the Fund was told about power-sector debt
Dawn reports that the IMF initially questioned an increase of Rs65 to 70 billion in power-sector circular debt, which stood at Rs1.675 trillion at the end of June 2026. Energy Update, reporting the Power Division's briefing to the Fund, puts the increase at Rs61 billion. Either way, the explanation offered was the same, and the Fund reportedly accepted the comparable numbers.
Three items stand out. First, the power sector "overperformed" on its efficiency targets, including bill recoveries and loss reduction, according to Dawn's sources. Second, the Ministry of Finance disbursed about Rs95 billion less in tariff differential subsidy than the sector expected, on the basis of the ministry's own calculation of what units supplied required. Third, K-Electric held back around Rs200 billion through litigation; Dawn notes that the high court and the appellate tribunal upheld NEPRA's decision envisaging around Rs200 billion in savings to power companies, though the utility may pursue further remedies. Energy Update adds that NEPRA and its Appellate Tribunal rejected KE's request for a Rs40 per unit tariff and approved Rs32.37.
Put plainly, distribution companies did better than planned on the variables they control, and debt still rose because of a budget line and a single counterparty. That should shape how the reform is sold. If the government presents BISP transfers as a circular debt measure, it will be judged against a stock that is mostly driven elsewhere.
Why power is ready and gas is not
The contrast between the two sectors is about records, not policy. Dawn and Business Recorder both report that electricity consumer documentation is considerably more advanced than gas, despite the power network's larger customer base. In gas, meter ownership and premises records are a serious problem. Consumers often avoid reporting changes of name or ownership for decades to avoid fresh security charges, and commercial premises frequently change hands on pagri with titles left unchanged. That makes it hard to identify households below the poverty line from meter data.
The gas numbers make the case for reform urgent but not for rushing it. Dawn puts gas-sector circular debt at around Rs3.6 trillion, roughly Rs1.8 trillion of principal and a similar amount of accrued interest and late payment surcharges. The Petroleum Division argues for uniform rates near OGRA's average prescribed price of about Rs1,700 per mmBtu, against a protected domestic category paying Rs200 to 350. Only four of 12 consumer slabs covered the cost of supply in winter, and rates were below break-even for about eight months of the year even after substantial fixed charges. Yet a uniform tariff without a working cash-transfer channel would push the full adjustment onto the poorest households with no offset. The Fund's advice to keep working with consultants on a longer-term mechanism is the sensible one.
Our recommendation is sequencing. Use the power-sector BISP mechanism as the pilot, publish its targeting error rates after the first billing cycles, and build the gas database in parallel, starting with domestic meters where ownership can be verified through existing BISP and NADRA records. Gas tariff rationalisation should follow the transfer channel, not precede it.
The questions the review leaves open
Three issues raised in this round are larger than the subsidy design and will decide whether the power sector's financial position actually improves.
Provincial arrears and the NFC. The government has told the Fund it plans to recover more than Rs110 billion in provincial electricity dues by deducting them from provincial shares under the NFC Award, with around Rs50 billion targeted in the near term, according to Energy Update. The legal mechanism depends on provinces giving written consent or debit authority to the State Bank. The same report notes that Khyber Pakhtunkhwa previously refused such authority when the Finance Ministry tried to deduct more than Rs6 billion a month against a separate cash grant, and that provinces are already being asked to generate Rs1.7 trillion in cash surplus. The Fund has reportedly flagged the fiscal pressure. Smart metering of provincial government connections, which the Power Division says it is installing, is the more durable fix: disputes over consumption, not just willingness to pay, sit behind these arrears.
The uniform tariff after privatisation. Energy Update reports that Pakistani officials did not give a definitive answer on whether the uniform national tariff would survive the privatisation of distribution companies. This is the most consequential open question in the review. A uniform tariff charges consumers of efficient and inefficient companies broadly the same rate and fills the gap with subsidy. If it continues after sale, the state keeps paying for the performance of companies it no longer controls. The K-Electric experience is the precedent everyone in the room has in mind. Investors pricing DISCO stakes need to know the answer, and so does the Finance Ministry's subsidy budget.
The industrial package. A hearing on the incremental industrial support package is scheduled for 5 October, according to Energy Update. The package, introduced in December 2025, offers eligible industry Rs22.96 per unit and was due for review after six months; it has been pending for nine. Sources quoted in the report suggest the review could raise the incremental rate, at a time when industrial electricity costs have risen around 10 per cent after tariff rebasing. Industrial demand is one of the few levers that can absorb surplus capacity and spread fixed costs. Raising the rate to satisfy a review timeline, without evidence on how much incremental load the package has actually brought onto the grid, risks losing that load.
A test of credibility
The Fund's praise this week was real. Dawn reports that the IMF acknowledged Pakistan's handling of the oil crisis during six months of the US-Iran conflict without supply disruptions or an extra budgetary burden, noting that other regional countries faced shortages, fiscal costs or both. That is a reputational asset going into the policy round.
The way to protect it is to keep the BISP reform honest about its scope. It is a fairness and efficiency reform that will make tariffs more cost-reflective and protect the poor more precisely. Circular debt in power will be decided by three other things: whether the Finance Ministry budgets the subsidy it owes, whether the KE dispute is settled, and whether the uniform tariff is redesigned before DISCOs change hands. If the review produces a clear answer on the last of these, it will have done more for the sector's balance sheet than any subsidy mechanism.