Govt commits to ending untargeted power subsidies under IMF terms

ISLAMABAD: Pakistan has committed to the International Monetary Fund (IMF) that it will phase out untargeted electricity subsidies for residential consumers and route any future support through the Benazir Income Support Programme (BISP) under conditions tied to a $1.2 billion climate support facility.

The commitment, reported as part of the second review of the Resilience and Sustainability Facility (RSF), is expected to affect residential consumers using up to 300 units a month, particularly lower- and middle-income households that use multiple electricity meters to split consumption and avoid higher tariffs applied to usage above 300 units.

Under the understanding with the IMF, Pakistan has promised to move from broad-based subsidies to a targeted mechanism through BISP by January next year. This would release around Rs500 billion currently allocated for tariff differential subsidies, mainly benefiting consumers using up to 200 units, agriculture tube wells, and consumers in tribal areas and Azad Jammu and Kashmir.

Government sources said the latest assurance was given during the second review of the RSF. Finance Minister Muhammad Aurangzeb said on Wednesday that the IMF executive board would approve $200 million of the RSF loan on Friday.

The IMF has linked the condition to the $1.2 billion climate facility, which requires Pakistan to align energy sector reforms with national climate commitments. According to the agreed framework, the government will introduce a better-targeted subsidy system that, in the IMF’s view, would reduce incentives for higher-income consumers to overuse electricity and ease pressure on industry to provide tariffs that do not reflect actual costs.

The government and the IMF also agreed that targeted subsidies could reduce consumption of subsidised units, lower the incentive for theft among lower-income consumers, and help bring down energy prices.

Implementation plans and BISP linkage

BISP currently has 10 million registered families in its database, while around 22 million electricity users consume up to 300 units. The government is working with the World Bank to connect electricity consumers with BISP’s National Social and Economic Registry database.

Before implementing the targeted subsidy plan from January next year, the government plans to test the effectiveness of the system by August this year in order to determine eligibility criteria. To create a payment mechanism for targeted subsidies, it also plans to hire a firm this month, according to the sources.

The government is already discouraging solar-based power generation in an effort to push consumers to purchase electricity from the national grid.

Climate financing conditions

As part of another condition attached to the $1.2 billion climate facility, Pakistan has already notified new regulations requiring procurement that complies with minimum energy performance standards.

Pakistan has also assured the IMF that strengthening climate resilience remains a priority. The country signed the $1.2 billion facility in return for commitments to integrate climate considerations into budget and investment planning, improve water system resilience and disaster response financing coordination, strengthen the enabling environment for green investment through better climate information architecture, promote green mobility and transport decarbonisation, and align energy reforms with climate goals.

To qualify for the $200 million tranche due for IMF approval on May 8, Pakistan fulfilled conditions that included issuing guidelines for managing climate-related financial risks and fresh guidelines enabling listed companies to disclose climate-related risks and opportunities.

Pakistan also told the IMF it was moving toward a framework to coordinate federal and provincial disaster risk financing needs under the National Disaster Risk Financing Strategy, while making progress on a comprehensive system to identify and prioritise climate-relevant spending.

The government has further committed to raising the climate weight in public investment procedures to at least 30% for infrastructure projects, developing explicit protocols for scoring projects against set criteria, and publishing the selection process and score distribution for new projects entering the federal Public Sector Development Programme.

Under the lending package, the government has also assured that it will begin digitally charging irrigation tax from farmers by August next year.

Finance minister’s remarks

Speaking at the second edition of The Breathe Pakistan International Climate Change Conference, organised by Dawn Media, Aurangzeb said there was a need to focus on existing climate financing available through the IMF, the World Bank and the Asian Development Bank.

He also reiterated plans to float $250 million Panda bonds this month to raise financing for environment-friendly and health projects.

"It is quite clear that we have to work very closely with our counterparts, ministers of climate change, planning ministry, we need to take a whole of government approach," the finance minister said, stressing the need to bring the climate change discourse into the mainstream, otherwise it would remain an academic discussion.

Aurangzeb said Pakistan was now in a very good place and praised the work of the National Disaster Management Authority. He added that AI-led early warning systems were in place and that the country now had scientific data about the actions that should be taken.

Despite contributing little to global emissions, Pakistan remains among the countries most vulnerable to climate shocks, as seen during the catastrophic 2022 floods and the severe 2025 floods.