Pakistan seeks $1bn from IMF to address climate risks, speed up  energy transition

ing last week’s International Monetary Fund (IMF) Annual Meetings, Pakistan’s Finance Minister Muhammad Aurangzeb sought $1 billion from the IMF’s Resilience and Sustainability Trust (RST) to address the country’s climate risks and speed up its energy transition.

Established in 2022, the RST provides concessional, long-term financing for climate-related projects in vulnerable low- and middle-income nations.

According to a government report, Pakistan’s power sector is plagued by inefficiencies, with circular debt in the power distribution network reaching Rs 2.66 trillion ($9.5 billion) as of May.

Meanwhile, citizens continue to experience frequent, prolonged power outages, leaving millions without reliable electricity. The main source of these issues has been identified as flawed capacity payment agreements with independent power producers (IPPs), whose high interest rates have exacerbated debt and driven up consumer tariffs, making electricity increasingly unaffordable.

In response to the finance minister’s request for IMF support and amid multiple IPPs terminating contracts, Pakistan is expected to announce major reforms. “These IPP payments have negatively impacted our citizens’ quality of life,” said Awais Laghari, Minister for Energy’s Power Division, adding that “it’s essential to address these challenges.”

While specific plans were not disclosed, Laghari mentioned that the power division is evaluating ways to alleviate the financial burden on consumers, whether from taxes or debt repayments, through measures that enhance both household finances and energy use.

Laghari also indicated plans to “unbundle” the electricity sector and create a more competitive energy market. The recent establishment of an independent system and market operator (ISMO) is a step towards fostering a business-to-business (B2B) market, which could expand into a business-to-business-to-consumer (B2B2C) model, offering consumers more options and reduced prices through competition.

Renewable energy will be crucial to power market reform, Laghari noted, due to its cost advantage and potential for producing affordable electricity, positioning renewables as key players in a competitive market.

Following the IMF meetings, the government also aims to proceed with the privatization of electricity distribution companies, with improvements in governance already underway.

Laghari believes privatization could enhance efficiency in these companies, which would help maintain their relevance in the power market and ultimately lead to more affordable energy for consumers.

He added that investment in transmission infrastructure remains a priority to enable lower-cost electricity generated in southern regions to be delivered nationwide, thereby reducing overall consumer tariffs.