Circular debt: Govt to cut KE claims by billions to meet IMF targets

ISLAMABAD: The federal government is set to deduct billions of rupees from pending claims of K-Electric (KE) to meet targets agreed under the IMF’s Memorandum of Economic and Financial Policies (MEFP), as it has committed to bringing the circular debt (CD) stock down to Rs1.6 trillion by June 30, 2026, well-informed sources in the Power Division told Business Recorder . The Ministry of Energy (Power Division) briefed the Economic Coordination Committee (ECC) on June 24, 2026, that the government is consistently working to address the multifaceted challenges facing the power sector. A major concern remains the persistent accumulation of circular debt, which stood at Rs1.924 trillion as of May 31, 2026, including Rs873 billion payable to banks under circular debt financing. The remaining liabilities relate to payments due to power producers, National Grid Company (NGC), and other entities. READ MORE: Reduction in CD flow: IMF cuts power subsidy volume to 0.6pc of GDP The Power Division warned that the growing payables have become unsustainable, with Independent Power Producers (IPPs) facing increasing pressure in meeting debt obligations and maintaining supply chains. The ECC was informed that timely payments to power producers are critical, as delays could further constrain electricity supply and negatively impact economic growth. Since IPP payments are backed by sovereign guarantees, delays also increase the risk of guarantee calls and late payment surcharges. Prompt disbursement of subsidies would help reduce financial costs and support circular debt flow targets, necessitating immediate liquidity injections into the sector. The Power Division further informed that Rs893 billion had been allocated for power sector subsidies in the current fiscal year. Of this, Rs257 billion was earmarked under Finance Division Demand No. 45 for payments to government power plants (GPPs) and IPPs as government equity. So far, Rs105 billion has been released, while the remaining Rs152 billion needs to be disbursed to CPPA-G before the close of the fiscal year. Sources said the Power Division circulated its summary to the Finance Division, PPMC, and CPPA-G on May 21, 2026. In its response dated June 11, 2026, the Ministry of Finance suggested that available funds be utilised through re-appropriation within the Power Division’s demand, as fiscal support was being sought under the Circular Debt Management Plan (CDMP) 2025-26. However, the Power Division clarified that the proposal does not seek additional fiscal support for managing circular debt flow but aims to utilise a Technical Supplementary Grant (TSG) to reduce the circular debt stock in line with CDMP targets and IMF commitments. It highlighted that despite improvements in DISCOs’ performance, the CD stock had already exceeded Rs1.9 trillion by May 31, 2026, making it difficult to meet the Rs1.6 trillion targets without timely release of all allocated funds, including the TSG. Regarding surplus funds under K-Electric’s Tariff Differential Subsidy (TDS), the Power Division pointed out that KE has not cleared its electricity dues, contributing approximately Rs200 billion to circular debt accumulation. As KE’s tariff matter is sub judice, the Division proposed re-appropriating these funds to meet sectoral cash flow requirements and IMF-agreed CD targets. It was proposed that the remaining Rs97.649 billion under the KE TDS head be re-appropriated and released in June 2026. The proposal was supported by CPPA-G and PPMC, which emphasised the need to release all budgeted subsidies before June 30, 2026. The Power Division requested the ECC to: (i) approve a TSG of Rs152 billion from Finance Division Demand No. 45 to Demand No. 33 for immediate release to CPPA-G as government equity in DISCOs; and (ii) approve re-appropriation of Rs97.649 billion from KE TDS (IB-9050) to Inter-DISCO Tariff Differential (IB-9048). Two options were presented: (i) release of the full Rs97.649 billion as advance subsidy against future tariff differential claims, along with adjustment of TESCO’s TDS arrears of Rs44.198 billion against outstanding subsidy advances; or (ii) release of Rs53.451 billion as advance subsidy and Rs44.198 billion specifically for TESCO arrears. During the discussion, the ECC was informed that KE’s non-payment of dues has significantly contributed to circular debt accumulation. The forum directed the Power Division to actively pursue the legal case following the High Court’s decision, in consultation with the Ministry of Law and Justice and the Attorney General. The Power Division assured that the case would be actively pursued from July 2026. In reply to a query, the Minister for Petroleum informed the ECC that KE has been served with disconnection notices for breach of guarantees, urging the Power Division to take cognisance. The forum advised both the Petroleum and Power Divisions to resolve the matter as a priority. The ECC considered the summary dated June 16, 2026, titled “Release of Rs152 billion TSG as equity in Power Distribution Companies and re-appropriation of available budget,” and partially approved the proposal. It allowed Rs54.451 billion after adjusting Rs97.549 billion from the total Rs152 billion. Copyright Business Recorder, 2026