IMF calls for structural overhaul of power sector, flags SOE reform delays

The International Monetary Fund has urged Pakistan to shift from short-term flow containment to deep structural reforms to reduce circular debt in the power sector, citing persistent financial distortions despite recent liquidity improvements, reported Business Recorder.

In its staff report on the second review under the Extended Fund Facility, the IMF said restructuring of Rs1.225 trillion in power sector debt has eased liquidity pressures, created fiscal space for social spending, and settled longstanding obligations without increasing costs for consumers.

The report noted that the federal cabinet has approved a three-year incremental pricing package for industrial and agricultural consumers to raise grid demand, setting a tariff of Rs22.98 per kilowatt-hour for consumption above a defined baseline. The scheme does not allow sector-specific concessions and includes automatic reviews if aggregate incremental consumption rises more than 25% above the baseline in any month.

According to the IMF, semi-annual reviews will assess cost-revenue alignment, with any revenue shortfall to be recovered through higher tariffs on industry and agriculture. Only positive fuel cost adjustments will apply to incremental use, and the scheme will expire after three years without rollover. It will be terminated earlier if it triggers tariff increases in two consecutive reviews.

The Fund said the next reform phase must focus on improving collections and reducing losses at distribution companies, implementing cost-cutting measures, and expanding private sector participation in distribution and generation companies. It also called for progress toward a competitive wholesale electricity market and action on RLNG surplus and circular debt stock in the gas sector.

The report stated that incentives for captive power producers to switch to the national grid have increased industrial electricity consumption by 35% year-on-year during April–August 2025, partially offsetting weak overall demand.

Separately, the IMF warned that delays in governance reforms, legislative amendments, and privatization of state-owned enterprises continue to pose fiscal and economic risks ahead of the next EFF review.

While acknowledging progress in macroeconomic stabilization under the 37-month programme, the Fund said SOE reforms remain uneven, with weaknesses in governance, transparency, and financial oversight continuing to generate losses and strain public finances.

One structural benchmark on amending laws governing remaining statutory SOEs was missed due to legislative delays. Draft amendments have been prepared, but the IMF noted timelines have slipped, proposing to reset the benchmark to end-August 2026. Amendments to most of the nine statutory SOE laws are expected to reach parliament before end-2025.

The IMF acknowledged progress in implementing the SOE governance framework for around 80 commercial entities, noting that the Central Monitoring Unit is fully staffed and producing regular analytical reports, with its electronic database nearing completion. However, it said many SOEs still lack credible business plans, statements of corporate intent, and IFRS-compliant audited accounts.

The report highlighted public service obligations as a key reform gap, noting they remain poorly defined, inadequately costed, and largely unfunded through the budget. The IMF said major SOEs are planned to be integrated into the FY27 budget framework to reduce implicit subsidies and fiscal risks.

Board independence across SOEs was also flagged as incomplete, despite legal requirements. Authorities have committed to appointing independent directors by end-December 2025.

On the Sovereign Wealth Fund, the IMF said operationalization remains on hold pending legal amendments to clarify mandate, ensure transparent divestment, and bring SWF-owned entities under the SOE governance framework. A new benchmark has been proposed for end-March 2026.

The Fund noted renewed momentum on privatization, with processes initiated for 15 SOEs under the 2024–29 programme, including power sector entities, and liquidation started for three SOEs, with another planned by end-December 2025 subject to cabinet approval. It added that progress has been recorded on Pakistan International Airlines and several distribution and generation companies, though outcomes remain uncertain.