'Pakistan settles circular debt with Rs1.275 trillion bank deal'

ISLAMABAD: Khurram Shehzad, Adviser to the Finance Minister, stated that the federal government has successfully resolved Pakistan’s long-standing issue of circular debt through a historic Rs1.275 trillion Islamic financing agreement with 18 commercial banks, ARY News reported.

Khurram Shehzad made the announcement, hailing the development as a foundation of the Prime Minister Shehbaz Sharif administration’s major energy restructuring.

Khurram Shehzad indicated that the financing deal will eradicate Rs1.275 trillion in circular debt, a burden that has long overwhelmed the country’s power sector.

A total allocation of Rs683 billion will be directed towards settling liabilities of the Power Holding Company, while Rs592 billion will be designated for Independent Power Producers (IPPs).

A loan of Rs1.275 trillion has been secured at a concessional rate to resolve Pakistan’s circular debt, set at 0.9% below the three-month KIBOR benchmark, in line with Pakistan’s commitment to achieving interest-free banking by 2028.

Khurram Shehzad highlighted that this new loan structure will not introduce additional surcharges for electricity consumers, who currently incur a debt service surcharge of Rs3 per unit. This surcharge will remain effective for the next five to six years.

Regarding the repayment of the load, Khurram Shehzad mentioned that the government will repay the loan over 24 quarterly instalments to get out of Pakistan’s circular debt, with an annual ceiling of Rs323 billion. This structured repayment approach is designed to prevent a recurrence of Pakistan’s circular debt and to mitigate further fiscal pressure on the national budget.

This initiative is part of wider reforms encompassed within Pakistan’s $7 billion IMF program, which focuses on curbing circular debt and enhancing the efficiency of the energy sector.

Additionally, the agreement aligns with the government’s objective of transitioning towards Islamic finance, which currently represents nearly a quarter of the country’s banking assets.

Khurram Shehzad indicated this deal as a “historic breakthrough” and credited the Prime Minister Shehbaz Sharif’s government for its decisive measures in attempting to address one of the nation’s most pressing economic challenges.