Federal budget FY2026–27: Govt to slash power sector subsidies by around 20pc

ISLAMABAD: The government is set to slash power sector subsidies by around 20 percent to Rs 830 billion in the federal budget for 2026–27, compared to an allocation of Rs 1. 036 trillion in 2025–26 and 7 percent from revised allocation of Rs 893 billion, sources told Business Recorder. However, the cumulative allocation under certain heads is expected to remain largely unchanged, with Rs 248 billion projected for FY2026–27 against Rs 249. 136 billion in FY2025–26, reflecting a marginal reduction of 0. 5 percent. According to sources, the Tariff Differential Subsidy (TDS) for distribution companies (Discos) and K-Electric (KE) is projected to decline to Rs 374. 136 billion in FY2026–27 from Rs 411 billion in FY2025–26, marking a reduction of about 9 percent. READ MORE: Protected consumers: Leghari says power subsidies not being withdrawn In contrast, TDS for K-Electric alone is expected to increase significantly to Rs 163 billion in FY2026–27, compared to Rs 126 billion in FY2025–26, showing a rise of over 26 percent. Out of the total projected subsidy of Rs 830 billion, around Rs 419 billion is expected to be allocated for merged districts of Khyber Pakhtunkhwa (erstwhile FATA), TDS for Azad Jammu and Kashmir, and the Pakistan Energy Revolving Account (PERA) established to facilitate payments to Chinese independent power producers (IPPs) under the China-Pakistan Economic Corridor (CPEC). Additionally, funds will be earmarked to settle outstanding receivables of Chinese IPPs, estimated at around Rs 550 billion. The International Monetary Fund (IMF) has reduced the power subsidy ceiling from 0. 7 percent to 0. 6 percent of GDP for FY2026–27, citing a decline in the flow of circular debt due to improvements in operational efficiency and sector performance. According to the IMF’s staff report released on May 15, 2026, following the circular debt stock reduction operation in FY2025–26, the FY2026–27 budget will limit power subsidies to a maximum of Rs 830 billion, equivalent to 0. 6 percent of GDP. The subsidy will cover: (i) tariff differential for Discos and KE; (ii) current and arrears payments for FATA; (iii) agricultural tube-wells; and (iv) circular debt stock payments to offset anticipated flows. The IMF is also pushing for a shift from untargeted cross-subsidies to direct, targeted cash transfers for low-income consumers through the Benazir Income Support Programme (BISP). On May 31, 2026, Minister for Power Sardar Awais Ahmad Khan Leghari stated at a press conference that the government has reduced power subsidies by Rs 475 billion—from Rs 1. 287 trillion in FY2024–25 to Rs 830 billion projected for FY2026–27. Under its agreement with the IMF, the government is required to cap circular debt at Rs 1. 614 trillion by June 2026, with zero growth in its flow. Currently, circular debt stands at over Rs 1. 7 trillion, implying that substantial allocations will be required in the upcoming budget to meet these commitments. An official said the government has already removed a financial burden of Rs 250 billion from industrial consumers. However, industries are now pressing for the elimination of the remaining cross-subsidy of around Rs 100 billion, which would need to be absorbed by other consumer segments. Copyright Business Recorder, 2026

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