Pakistan’s government has approved a Rs200 billion ($700 million approx.) electricity subsidy to prevent a sharp rise in circular debt over the next six months, officials said on Wednesday. The decision comes as mounting financial pressure in the power sector threatens electricity supply, public finances, and broader economic stability.
The approval was granted by the Economic Coordination Committee (ECC) of the federal cabinet during a meeting in Islamabad. Authorities described the step as essential to manage cash flow problems in the energy sector and to remain within limits agreed with the International Monetary Fund (IMF).
Why the Subsidy Was Approved
According to the Ministry of Finance, the ECC meeting was chaired by Finance Minister Muhammad Aurangzeb. Members reviewed the worsening liquidity situation facing power distribution companies, known as DISCOs, which struggle to recover costs from consumers while meeting payment obligations.
To address these challenges, the ECC approved a supplementary grant of Rs200 billion. The funding will be provided as government investment in the equity of DISCOs, allowing them to meet immediate payment requirements.
Out of the total amount, Rs105 billion will be released directly by the Ministry of Finance. The remaining sum will be covered through existing electricity subsidy allocations. Officials said this structure would reduce pressure on the budget while ensuring timely support for the sector.
Growing Circular Debt a Key Concern
The Power Division briefed the ECC on alarming projections related to circular debt. By the end of October 2025, circular debt had reportedly reached Rs1.817 trillion. Without intervention, it is expected to rise to Rs2.105 trillion by December 2025.
This would represent an increase of Rs491 billion compared to June levels, a figure that exceeds limits agreed under Pakistan’s IMF-supported programme. Officials warned that such growth could undermine fiscal discipline and weaken investor confidence.
Circular debt accumulates when electricity bills are not fully recovered from consumers, while the government delays payments to power producers. Over time, this creates a chain of unpaid liabilities across the energy sector.
Also Read: Electricity Relief Withdrawn: Rs. 7.41 Per Unit Subsidy Ends
Risks to Electricity Supply and the Economy
Officials cautioned that failure to make timely payments to power generation companies could have serious consequences. These companies rely on regular payments to purchase fuel and maintain operations.
“If payments are delayed, electricity availability may be further disrupted,” the Power Division told the ECC. Any prolonged disruption could affect industrial output, small businesses, and household consumers.
Pakistan has already faced frequent power shortages in recent years, especially during peak demand periods. Energy disruptions have repeatedly slowed economic activity and increased public dissatisfaction.
The government believes the newly approved subsidy will help control the flow of circular debt, rather than eliminate it entirely. However, officials acknowledged that deeper structural reforms remain necessary.
IMF Commitments and Fiscal Pressure
Pakistan is currently operating under an IMF-backed economic programme that places strict limits on subsidies and borrowing. Energy sector reform is a core requirement of the programme.
In recent months, the government has raised electricity tariffs and adjusted fuel prices to reduce losses. However, these measures have also increased inflationary pressure on households.
The latest subsidy approval reflects the difficult balance authorities face between fiscal discipline and economic stability. While the IMF discourages untargeted subsidies, officials argue that temporary support is unavoidable to prevent system-wide failure.
Other Decisions Taken by the ECC
In addition to the power subsidy, the ECC approved funding for several other initiatives. These included allocations for parliamentarians’ discretionary development schemes, ongoing development projects, and the Prime Minister’s Fan Replacement Programme, which aims to reduce electricity consumption through energy-efficient appliances.
Financial assistance was also approved for families of missing persons, highlighting the government’s parallel focus on social welfare. The committee further reviewed inflation trends and food security, both of which remain sensitive issues amid rising living costs.
Looking Ahead
While the Rs200 billion subsidy may provide short-term relief, analysts note that Pakistan’s power sector continues to face deep-rooted issues. These include low bill recovery, governance challenges, and reliance on expensive imported fuels.
For now, the government hopes the move will stabilise the system and prevent further economic disruption. Long-term sustainability, however, will depend on consistent reforms and improved efficiency across the energy value chain.
