Islamabad Tells IMF It Will Claw Back Rs110 Billion in Power Dues From Provinces' Own NFC Shares

Pakistan's federal government has told the International Monetary Fund it intends to recover more than Rs110 billion in unpaid provincial electricity dues by deducting the money directly from provinces' shares under the National Finance Commission award, as the Power Division works to explain a fresh Rs61 billion jump in power-sector circular debt during ongoing IMF review talks.

The debt figure the IMF is pushing back on

Power Division officials briefed the IMF mission that circular debt rose to Rs1.675 trillion by the end of June 2026, up from Rs1.614 trillion a year earlier — a Rs61 billion increase the Fund says is becoming harder to defend to its own Executive Board, particularly because officials acknowledged the increase could have been offset using available fiscal savings instead of being allowed to accumulate. That tension sits inside the same MEFP negotiations this desk covered on October 6, where the government and the Fund's review mission are racing to close gaps on the current account deficit and power subsidy timelines before a staff-level agreement is reached.

Where the new debt actually came from

Two sources account for most of the increase. Distribution companies' own losses and weak bill recovery added roughly Rs326 billion over the year. Separately, K-Electric's unpaid dues to the national grid added Rs194 billion, a dispute rooted in Karachi's utility refusing to pay while it contested its own multi-year tariff determination. NEPRA and its appellate tribunal rejected K-Electric's bid for a Rs40-per-unit tariff and instead approved Rs32.37 per unit — the same rate this desk detailed when NEPRA notified it in September — but the dispute itself kept K-Electric's payments frozen long enough to add nearly Rs200 billion to the national circular debt pile. How circular debt mechanically builds in the first place is explained in more detail here.

The NFC plan, and why it's politically combustible

To offset the increase, the Power and Finance Divisions have agreed on a mechanism to recover unpaid provincial electricity arrears by deducting the money from provinces' own shares under the National Finance Commission award — the formula that distributes federal tax revenue to Punjab, Sindh, Khyber Pakhtunkhwa and Balochistan. At least Rs110 billion in arrears has already been reconciled between federal and provincial accounts, with close to Rs50 billion more expected to be confirmed soon. The catch is legal rather than just political: the State Bank of Pakistan cannot actually execute a deduction from a province's NFC share without that province's own written consent and debit authority. Provincial governments have resisted near-identical proposals before, arguing that unilaterally docking their share of the federal divisible pool oversteps the NFC formula's intent — a dispute that has repeatedly resurfaced since at least 2025 without being fully resolved.

Why this is landing now, and not quietly

The timing puts a federal-provincial funding fight directly inside an active IMF review, at a moment when the government is also defending a 91% drop in net fiscal flow from state-owned enterprises to the treasury — two of the loss-making SOEs on that list, Quetta Electric Supply Company and Sukkur Electric Supply Company, are themselves power distribution companies contributing to the same circular debt pile this NFC plan is meant to address. If provinces decline to sign off on the NFC deduction, the federal government is left explaining to the IMF why a reconciled, on-paper recovery plan produced no actual cash — the same credibility problem that made the original Rs61 billion increase hard to defend in the first place.

What happens next

The outcome depends on provincial finance departments, not the IMF mission currently in Islamabad. If Punjab, Sindh, Khyber Pakhtunkhwa and Balochistan agree to the deductions, the Rs110 billion in reconciled arrears could move quickly, trimming the headline circular debt figure before the fourth EFF review concludes. If they don't, the dispute becomes one more structural benchmark the IMF revisits at the next review rather than one resolved at this one — and the circular debt figure keeps compounding in the meantime, the way it has every year this decade.

Build Better Pakistan's Energy Desk is tracking the NFC deduction plan and will report on provincial responses as they're confirmed.