FY26 budget will include lower subsidies than in FY25
ISLAMABAD - The federal government will pass on a relief of Re0.9 per unit, collected on account of levy on Captive Power Plants, to the country’s electricity consumers. “We have also begun to receive flows from the captive power plant (CPP) transition levy, the revenue from which will allow for additional tariff reduction (through this financed subsidy) for all grid consumers,” Pakistan informed International Monetary Fund.
“We estimate the impact to be Re0.90/unit at the start, anticipating further reductions as the CPP levy is increased at regular intervals already in law through 2026,” the government said while updating the fund on necessary budget allocations for power subsidies. To meet condition of the International Monetary Fund (IMF), Pakistan had imposed up to 20 percent levy-phase wise-on the supply of natural gas/RLNG to Captive Power Plants in January 2025.
President Asif Ali Zardari had promulgated an ordinance empowering the federal government to increase levy by 5 percent immediately and further increase to 10 percent by July, 2025, 15 percent by February, 2026 and 20 percent by August, 2026. The Ordinance called ‘Off the Grid (Captive Power Plants) Levy Ordinance, 2025, empowered the federal government to impose an off the grid levy on natural gas based captive power plants and will be used to reduce power tariff for other consumers.
Pakistan has further informed the fund that with signs of energy sector reforms already having some initial impact in terms of reducing electricity costs, the FY26 budget will include lower subsidies than in FY25. This reflects the impact of the circular debt stock operation (which lowers the need for CD stock payments) and the ongoing impact of the government’s energy sector reform strategy. “Nonetheless, we have decided from March 17, 2025, to introduce a limited subsidy, financed by a Rs 10 per liter PDL increase, which will expire on June 30, 2026, at an annualized amount of Rs 182 billion. These revenues will finance a subsidy to be applied to all non-lifeline consumer categories, resulting in an average electricity tariff reduction of Rs1.7/unit”.
These subsidies will allow front loading of our reforms’ benefits to be felt by grid consumers while the longer-term structural cost reduction impact of the reform process, including from the CPP transition, gradually takes effect. The subsidy will be limited to at most 0.8 percent of GDP and will cover POL-derived revenues of Rs 182 billion to provide further temporary tariff relief; the projected tariff differential; arrears payments of FATA and KE; (tv) agricultural tubewells, and CD stock payments to compensate for the any CD flow, which will be targeted to be much lower following the CD conversion operation.