IMF warns Pakistan faces LNG supply disruptions, rising circular debt and delayed power reforms

IMF says Pakistan is struggling with surplus LNG contracts, delayed DISCO reforms and rising energy sector financial pressures

Pakistan is scrambling to secure adequate liquefied natural gas supplies after disruptions in LNG shipments from the Gulf while simultaneously grappling with a growing circular debt burden and delayed power sector reforms, according to the latest report by the International Monetary Fund.

The IMF said recent supply disruptions had shifted the government’s immediate focus to ensuring sufficient energy availability, even as authorities continue to face structural imbalances in the gas and power sectors.

The lender noted that Pakistan still needs to resolve the growing surplus of re-gasified liquefied natural gas, or RLNG, created by long-term LNG import contracts signed when domestic demand projections were higher.

“Disrupted LNG shipments from the Gulf have shifted the authorities’ attention to ensuring sufficient supply in the near term,” the IMF said. “Nonetheless, the RLNG surplus resulting from long-term contracts and falling demand remains to be addressed.”

The report said the recent establishment of a National Integrated Energy Plan secretariat, jointly led by the Petroleum and Power Ministries, was a positive development aimed at improving coordination between energy supply and demand planning.

The IMF said authorities remained focused on reducing Pakistan’s large and expanding circular debt stock in the energy sector, which continues to weigh heavily on public finances and the broader economy.

To contain the buildup of liabilities, the government has continued implementing timely tariff adjustments to maintain cost recovery while preserving a progressive tariff structure designed to shield lower-income consumers.

The Fund welcomed the completion of an audited and reliable database on gas sector circular debt and its quarterly dissemination to stakeholders, describing it as an important step toward developing a sustainable resolution plan.

At the same time, the IMF urged authorities to continue efforts to reduce unaccounted-for gas losses, which remain a major contributor to inefficiencies in the sector.

The report said Pakistan remained committed to implementing broader power sector structural reforms aimed at lowering electricity costs for households and businesses over the long term.

The privatization and private-sector participation process for power distribution companies, or DISCOs, is continuing but has faced delays, according to the IMF. A second phase of DISCO reforms is also being prepared, with preconditions expected to be completed by the end of December 2026.

The IMF noted that restructuring of the transmission network had been finalized and that Pakistan plans to launch its first wholesale electricity auctions in mid-2026 as part of efforts to improve market efficiency and competition.

The Fund also commented on recent reforms introduced by the National Electric Power Regulatory Authority regarding rooftop solar power consumers.

Under the new policy, solar users are being shifted from a net metering system to a net billing model, bringing Pakistan more in line with international practice and aiming to create a more balanced relationship between solar generation and grid consumption.

However, the IMF warned that exempting existing solar consumers from the revised framework would maintain what it described as a significant and potentially regressive cross-subsidy from conventional electricity consumers to solar users in the near term.

The report said the operational performance of power distribution companies had improved, contributing to a reduction in circular debt flows, but stressed that non-operational factors continued to create financial pressures.

According to the IMF, continued timely tariff adjustments are critical to preventing a resurgence in circular debt, especially amid volatility in global fuel prices.

The Fund highlighted that a substantial tariff reduction for industrial consumers introduced in February maintained overall cost recovery by reducing the cross-subsidy burden previously borne by industries for residential consumers.

That adjustment was offset by higher or newly introduced fixed charges on residential consumers, including some protected categories.

The IMF stressed that future tariff reforms should preserve the progressive structure of electricity pricing while improving the targeting of subsidies toward vulnerable consumers.

Pakistan’s circular debt flow target for fiscal year 2027 has been set at PKR 300 billion, down PKR 100 billion from the FY26 target, reflecting expectations of further operational improvements in the sector.

Lower projected circular debt accumulation would also reduce the planned power subsidy requirement from 0.7% of GDP in FY26 to 0.6% of GDP in FY27, the IMF said.

However, the lender warned that delays in settling penalty payment arrears owed to independent power producers remain a significant challenge to achieving the government’s circular debt reduction strategy.