In the upcoming federal budget for FY2026–27, the government is preparing to reduce power sector subsidies by approximately 20%, bringing the total allocation to Rs 830 billion. This marks a significant decline from the Rs 1.036 trillion allocated in FY2025–26 and a 7% decrease from the revised estimate of Rs 893 billion.
Key Subsidy Breakdown
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Tariff Differential Subsidy (TDS): The allocation for distribution companies (Discos) and K-Electric (KE) is projected to drop to Rs 374.136 billion, a 9% reduction from the previous year’s Rs 411 billion.
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K-Electric Focus: Despite the general decline, the TDS specifically for K-Electric is set to rise by over 26%, reaching Rs 163 billion (up from Rs 126 billion).
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Strategic Allocations: Of the total Rs 830 billion, Rs 419 billion is earmarked for the merged districts of Khyber Pakhtunkhwa (erstwhile FATA), Azad Jammu and Kashmir, and the Pakistan Energy Revolving Account (PERA). These funds are crucial for facilitating payments to Chinese Independent Power Producers (IPPs) under the CPEC framework.
IMF Directives and Fiscal Targets
The reduction aligns with International Monetary Fund (IMF) requirements. The IMF has lowered the power subsidy ceiling to 0.6% of GDP (down from 0.7%) for the coming fiscal year, reflecting anticipated improvements in sector performance and a slowdown in circular debt growth.
The IMF is also actively encouraging the government to pivot away from broad, untargeted cross-subsidies, favoring instead direct cash transfers via the Benazir Income Support Programme (BISP) to support low-income households.
Addressing Circular Debt and Industrial Pressures
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Circular Debt Goal: The government is under a strict mandate to cap circular debt at Rs 1.614 trillion by June 2026. With current debt levels exceeding Rs 1.7 trillion, significant budgetary priority is being placed on managing these flows.
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Industrial Relief: While the government has already relieved industrial consumers of a Rs 250 billion burden, industries are continuing to lobby for the removal of the remaining Rs 100 billion in cross-subsidies, which would require a redistribution of costs to other consumer segments.
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Ministerial Stance: Minister for Power Sardar Awais Ahmad Khan Leghari noted that through these strategic adjustments, the government has successfully curtailed total power subsidies by Rs 475 billion compared to FY2024–25 levels.
