By: Ahmed Shamsur Rehman
Published By: ANI News Agency
The International Monetary Fund (IMF) has reiterated the need for Pakistan to overhaul its electricity subsidy system by replacing broad-based cross subsidies with targeted financial assistance for low-income households through the Benazir Income Support Programme (BISP). The new framework is scheduled to be implemented by the end of January 2027, marking a significant shift in the country’s electricity pricing and social protection policies.
The development follows the IMF’s 2026 Article IV consultation with Pakistan and a staff-level agreement on the fourth review under the 37-month Extended Fund Facility (EFF) and the third review under the 28-month Resilience and Sustainability Facility (RSF).
An Article IV Consultation is an annual process through which the IMF engages with the government of each member country to assess its overall economic and financial health, identify potential risks and recommend appropriate policy measures to help prevent future economic difficulties. During these consultations, the Fund reviews a country’s economic performance, fiscal and monetary policies, financial stability, external position and structural reform priorities. The process provides a framework for discussing economic challenges and identifying measures to support stability and sustainable growth.
The IMF team, led by Ms. Iva Petrova, held discussions with Pakistani authorities in Karachi and Islamabad from September 23 to October 7, 2026. The staff-level agreement remains subject to approval by the IMF Executive Board. Following approval, Pakistan is expected to receive approximately US$1 billion under the EFF and around US$210 million under the RSF, bringing total disbursements under the two arrangements to approximately US$5.7 billion.
Electricity Subsidies to Be Linked to BISP
A central component of the reform agenda is the restructuring of electricity subsidies. Pakistan has committed to replacing the existing budgeted tariff differential subsidy and cross subsidy arrangements with a targeted subsidy framework for low-income electricity consumers through BISP.
Under the existing system, domestic consumers classified as “protected” on the basis of electricity consumption of up to 200 units may qualify for comparatively lower tariffs, subject to applicable eligibility conditions. The existing tariff structure provides rates of approximately Rs10.54 per unit for the first 100 units and Rs13.01 per unit for the next 100 units.
However, the government and the IMF have raised concerns about whether consumption-based subsidies adequately identify households that genuinely require financial assistance. Electricity consumption alone does not necessarily reflect a household’s income or socioeconomic circumstances.
Under the proposed mechanism, eligibility for assistance will be determined more closely by household socioeconomic status rather than electricity consumption alone. This would shift the emphasis from providing relief through comparatively lower electricity tariffs to delivering targeted financial support to eligible low-income families.
According to the IMF programme documents, Pakistan is working with the World Bank to link electricity consumers with the National Socio-Economic Registry (NSER), conduct data validation checks and establish eligibility criteria for the new system.
The authorities have committed to completing the transition from the existing tariff differential and cross-subsidy arrangements to a targeted subsidy framework, with BISP disbursements through the new mechanism scheduled to begin by the end of January 2027.
The reform is intended to direct limited public resources towards the most vulnerable households, reduce subsidy leakages and minimise incentives for excessive electricity consumption. It is also expected to address distortions in the electricity tariff structure and improve the efficiency of government support.
Rs830 Billion Allocated for Power Subsidies
Pakistan has allocated up to Rs830 billion, equivalent to approximately 0.6 per cent of gross domestic product (GDP), for power-sector subsidies in FY2027.
The IMF has emphasised that electricity tariffs should continue to move towards cost recovery while ensuring that vulnerable consumers receive appropriate protection. The challenge for policymakers is to improve the financial sustainability of the power sector without imposing an excessive burden on households that cannot afford higher electricity costs.
The subsidy reform is also closely connected to Pakistan’s efforts to contain circular debt in the power sector. The government has committed to reducing the accumulation of power-sector circular debt and working towards zero net circular debt flow through timely tariff adjustments, improved recoveries, operational reforms and greater efficiency across electricity distribution companies.
The Fund has also called for measures to improve the performance of distribution companies, increase private sector participation, strengthen competition in the electricity market and reduce operational losses throughout the energy sector.
These reforms are intended to address structural weaknesses that have contributed to financial pressures in the power sector and limited the government’s capacity to sustain broad-based subsidies.
BISP Payments to Increase from January 2027
Alongside electricity subsidy reforms, the IMF has stressed the importance of strengthening social protection to cushion vulnerable households from the effects of economic adjustment and higher energy costs.
Under the agreed programme, the quarterly BISP Kafaalat benefit is scheduled to increase from Rs14,500 to Rs18,000 beginning in January 2027. The authorities have also committed to continuing inflation adjustments to protect the real purchasing power of benefits received by eligible families.
The increase is intended to strengthen assistance for low-income households as the government moves towards a more targeted approach to public subsidies. The effectiveness of the new electricity relief system will depend on accurate beneficiary identification, reliable data sharing, transparent eligibility criteria and an efficient payment mechanism.
The transition will also require clear communication with electricity consumers to explain how the new arrangements will work and how eligible households can access assistance.
Economic Recovery Amid External Risks
The IMF’s latest assessment also highlighted improvements in Pakistan’s macroeconomic position. Real GDP growth reached 4 per cent during the first three quarters of FY2026, while full-year growth was estimated at 3.6 per cent. Headline inflation, after peaking in May, moderated to approximately 10.3 per cent in September, while the current account remained broadly balanced, supported by strong remittance inflows.
Gross foreign exchange reserves increased to approximately US$21.5 billion by the end of September, strengthening the country’s external position.
The Fund noted that Pakistan had navigated the economic impact of the conflict in the Middle East, although significant risks remained from geopolitical tensions, volatile energy prices, tighter global financial conditions and disruptions to international trade.
Against this backdrop, the IMF has urged the government to maintain disciplined fiscal policies and implement the FY2027 budget in line with an underlying primary surplus target of 2 per cent of GDP.
It has also called for continued tax administration reforms, including risk-based audits, digital invoicing and the use of third-party data to improve compliance and revenue collection.
On social spending, the IMF noted that Pakistan had increased health and education expenditure from 2.2 per cent of GDP in FY2024 to 2.5 per cent in FY2026, with the government targeting 2.8 per cent in FY2027.
The Fund has also called for the prompt phasing out of the broad-based fuel support scheme. Any future fuel assistance, it has stressed, should be temporary, targeted through established social protection programmes and accommodated within the existing budget framework.
Structural and Climate Reforms
The 2026 Article IV consultation also focused on structural reforms considered necessary to improve Pakistan’s long-term economic performance. These include strengthening competition, reducing regulatory and trade barriers, advancing privatisation, improving the governance of state-owned enterprises, strengthening anti-corruption institutions, developing financial markets and establishing a simpler and fairer tax system.
The IMF also welcomed progress under Pakistan’s climate reform agenda, including efforts to integrate climate considerations into public investment planning, strengthen disaster-risk financing, improve irrigation water pricing and collection, enhance energy efficiency and advance transport decarbonisation.
These measures form part of the broader effort to improve economic resilience, attract investment, strengthen public institutions and reduce the economy’s exposure to external shocks.
A Shift Towards Targeted Relief
The transition from consumption-based electricity subsidies to BISP-linked assistance represents a significant change in Pakistan’s energy and social protection policies. Under the proposed framework, the government intends to move away from providing broad relief primarily on the basis of electricity consumption and towards a system in which assistance is determined by the socioeconomic vulnerability of households.
The success of the reform will depend on whether the government can identify eligible families accurately, deliver payments transparently and ensure that vulnerable consumers are not left without support during the transition.
The government and the IMF view the reform as a means of improving the efficiency and financial sustainability of the power sector while directing scarce public resources towards families most in need. Its implementation by January 2027 will be an important milestone in Pakistan’s ongoing efforts to reform electricity subsidies, strengthen social protection and address persistent financial pressures in the energy sector.
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