Pakistan govt signs Rs1.275 trillion loan to address power sector circular debt

ISLAMABAD: In a major step toward resolving the persistent circular debt in Pakistan’s power sector, the federal government on Thursday signed a Rs1.275 trillion financing agreement with a consortium of 18 commercial banks at reduced interest rates.

The signing ceremony took place at the Prime Minister’s Office (PMO) in Islamabad, while Prime Minister Shehbaz Sharif virtually attended the event from New York, where he is participating in the United Nations General Assembly session.

The financing arrangement secures Rs1.275 trillion from commercial banks at an interest rate of 3-month KIBOR (the benchmark rate banks use to price loans) minus 0.9%.

Repayments will be made through the existing surcharge of Rs3.23 per unit already included in electricity bills.

This initiative represents a strategic shift from previous policies of maintaining a fixed circular debt level. Instead, the focus is now on gradually reducing the debt burden through structured bank financing.

According to the press release issued by the Finance Ministry, this joint effort was led by the Prime Minister’s Task Force on Power in coordination with the Ministry of Energy, the State Bank of Pakistan, the Pakistan Banks Association, and 18 partner banks.

The funds will be used to settle outstanding dues owed to Independent Power Producers (IPPs) and to clear the liabilities of the Power Holding Company. Of the total amount, Rs683 billion is allocated for the Power Holding Company, while Rs592 billion will go toward payments to IPPs.

The loan will be repaid in 24 equal quarterly installments. An annual repayment cap of Rs323 billion has been set, with a total ceiling of Rs1.938 trillion in the event of future interest rate increases.

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.