Pakistan will present the International Monetary Fund (IMF) with a three-year plan to eliminate the gas sector's Rs3.6 trillion ($12.9 billion) circular debt, as the government seeks to meet a key IMF condition ahead of economic review talks scheduled for the last week of September. The Finance Ministry is expected to brief the IMF on the proposed settlement plan during the upcoming review, with the final framework to be settled after consultations with the lender, according to officials familiar with the matter.

The gas sector's circular debt has risen to about Rs3.6 trillion, comprising Rs2.1 trillion in interest and Rs1.5 trillion in principal. The debt has accumulated through a combination of tariff differentials, unpaid receivables and policy-related costs. A report presented to a government committee put the tariff differential at Rs1.4 trillion, while power-sector receivables stood at Rs123 billion, sales and income tax receivables at Rs211 billion and litigation costs at Rs58 billion.

The burden has also been compounded by costly LNG supplies. Gas utilities diverted expensive imported LNG to domestic consumers, while disruptions to LNG supplies under Pakistan's agreement with Qatar forced the country to arrange spot cargoes at substantially higher prices. The proposed settlement relies on multiple sources.

About Rs840 billion is expected to come from dividends of gas companies, while Rs270 billion could be generated through the petroleum levy. The plan also envisages reducing the debt by Rs310 billion through the deferral of additional LNG cargoes from Qatar, Rs15 billion through the power sector's take-or-pay arrangements and Rs60 billion through full recovery of LNG costs. The government also plans to settle the interest component of the circular debt.

However, full LNG cost recovery could increase gas prices for consumers, raising concerns about additional inflationary pressure. The government is expected to discuss the potential impact with the IMF before finalising the plan.