Pakistan’s latest debate over energy state owned enterprises looks like an accounting matter, but it is really a test of fiscal honesty and investor protection. The government is reportedly considering relief from International Financial Reporting Standards (IFRS) 9 and IFRS 14 for major energy state-owned enterprises (SOEs), including SNGPL, SSGCL, PSO, OGDCL, PPL and GHPL.
The concern is that full implementation may force recognition of expected credit losses of around Rs400 to Rs500 billion because receivables are trapped in the circular debt chain. Gas circular debt alone is reported at more than Rs3.4 trillion. Since the SOE Act 2023 allowed a transition period for IFRS compliance and that window has now effectively matured, the issue should be handled through a limited and time bound adjustment period, with proper disclosure, rather than through a broad exemption that weakens the reform objective.
The central issue is simple. Pakistan’s energy companies are carrying large receivables because government payments, tariff differentials, subsidies and inter corporate settlements are delayed. On paper, these amounts may appear recoverable. In practice, recovery depends on fiscal space, political decisions, tariff approvals and circular debt settlement plans. When the state delays payments to one entity, that entity delays payments to another. The result is not only a cash flow problem. It becomes a balance sheet problem and, for listed SOEs, an investor confidence problem.
IFRS 9 asks companies to recognise expected credit losses. If a company has receivables and there is a risk that the money may not be recovered on time, it must estimate that risk and reflect it in its accounts. This is not a punishment. It is a warning system for investors, creditors, regulators and taxpayers. It tells the market whether the receivable shown as an asset is strong, delayed, doubtful or politically dependent.
Pakistan should not use accounting exemptions to make losses disappear
IFRS 14 deals with regulatory deferral accounts. In regulated sectors, such as gas and electricity, companies may have balances linked to tariff decisions, future recoveries or regulatory adjustments. This matters because SNGPL and SSGCL operate where tariff shortfalls, subsidy claims and recoverables relate to government decisions. Without proper disclosure, investors may confuse policy created receivables with normal business assets.
Can the government exempt these companies? Legally, there is some space, but it is not unlimited. The SOE Act 2023 requires boards of SOEs to prepare audited financial statements in accordance with IFRS and ensure a true and fair view. It also allows partial or complete exclusion through recorded reasons and official notification, provided the Act’s objectives are not undermined.
The SOE Ownership and Management Policy 2023 further requires justification and consultation with the Finance Division and the Central Monitoring Unit. The Securities and Exchange Commission of Pakistan has also granted limited IFRS 9 relief in the past for government debt in the power supply chain. Therefore, exemption may be possible, but only as an exceptional step. It cannot become a route to avoid disclosure.
The government’s dilemma should not be dismissed. Immediate recognition of large impairments may reduce reported profits, weaken equity, affect listed share prices and create concern among minority shareholders.
Much of this receivable problem arises from public policy decisions, tariff delays and government settlement failures. If these receivables arise from public service obligations, tariff subsidies, or government directed pricing decisions, then the government should not leave the burden parked on SOE balance sheets; it must budget, settle, and where necessary provide fiscal support or bailout funding to the affected SOEs following the principle of transparency. Asking energy SOEs to book such losses without a credible fiscal settlement plan can also appear unfair.
But exemption does not recover cash. It does not reduce circular debt. It does not improve governance. It only changes when and how the damage is shown. If a receivable is weak because the circular debt chain is weak, avoiding IFRS will not make it stronger. It will only make the balance sheet look better than the underlying reality.
This is where the threat to investors becomes serious. If impairment is deferred, profits, equity and asset values may look stronger than they actually are. Investors may buy or hold shares based on numbers that do not fully reflect recovery risk. Dividends may appear more affordable than they are. But if the government later fails to settle receivables, the same losses can return suddenly through impairments, lower dividends, weaker cash flows and sharp price corrections. Exemption transfers today’s accounting stress into tomorrow’s market shock.
The wider data confirms that this is a structural problem. The International Monetary Fund has noted gas circular debt of around Rs3.4tr or 2.7 per cent of GDP, by December 2025, and power circular debt at around Rs1.764tr in early 2026.
Company level data show the same chain. PSO reported receivables of about Rs412bn as of December 31, 2025, including about Rs288bn attributable to SNGPL. SNGPL’s quarterly accounts showed more than Rs1tr in payables to major energy suppliers.
The solution should not be a blanket five-year exemption. If any relief is unavoidable, it should be short, conditional, company specific and disclosure heavy. A one-to-two-year transition, linked to a publicly announced settlement plan, would be more defensible than a long holiday from transparency. Even during relief, companies should disclose the estimated IFRS impact in the notes to accounts, including expected credit losses, receivable ageing, subsidy claims and government guarantees.
Second, the government must publish a circular debt settlement plan with clear timelines, financing sources and responsible institutions. Accounting relief without settlement is cosmetic.
Third, boards and audit committees of SOEs must certify receivables, disclose recoverability risks and explain why any amount is considered recoverable. Fourth, the operating causes of circular debt must be tackled, including weak recoveries, system losses, delayed tariff decisions, unfunded subsidies, political pricing and poor payment discipline.
Finally, minority shareholders must be protected. Listed SOEs cannot be treated as extensions of the budget without consequences. Investors deserve accounts that show both commercial performance and government related risks. Hiding impairments may support market capitalisation temporarily, but over time it weakens trust.
Pakistan should not use accounting exemptions to make losses disappear. IFRS is not the cause of circular debt; it is the mirror showing its cost. The real reform is not to blur the mirror, but to fix the chain behind it. A temporary, fully disclosed transition may be justified. A broad exemption that hides fiscal risk would weaken SOE reform and expose investors to losses they were not allowed to see in time.
The author is an associate professor of finance at the Pakistan Institute of Development Economics.
Email: ahmad.fraz@pide.org.pk
Published in Dawn, The Business and Finance Weekly, July 13th, 2026