The Federal Cabinet on Wednesday approved a historic Rs 1.275 trillion loan agreement between the Government of Pakistan and around 18 commercial banks, aiming to reduce the mounting circular debt, which has crossed Rs 2.4 trillion.
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The long-awaited deal was finalized after intensive negotiations and has received the International Monetary Fund’s (IMF) approval as part of Pakistan’s power sector debt reduction strategy.
According to official documents, the government has committed to borrowing Rs 1.252 trillion to repay outstanding loans of the Power Holding Company Limited (PHL) and settle remaining arrears owed to Independent Power Producers (IPPs).
Key Features of the Loan Agreement: Fresh Lending: Commercial banks will lend Rs 683 billion at an interest rate of 10.50–11%, tied to the Karachi Interbank Offered Rate (KIBOR) minus 0.90 basis points.
Repayment Mechanism: The loan will be repaid over six years through 24 semi-annual installments via the Debt Service Surcharge (DSS), currently set at Rs 3.23 per unit on electricity bills.
Zero Impact on National Treasury: The repayment will be consumer-funded, placing no additional burden on the federal budget.
Repayment Caps: An annual repayment ceiling of Rs 323 billion has been established. In case of rising interest rates, the total cap is set at Rs 1.938 trillion.
Sources revealed that commercial banks initially sought a guarantee from the State Bank of Pakistan (SBP) in the event of a default. However, government negotiators subtly emphasized that a collapse in the power sector would directly threaten the banks’ investments. Officials have denied any threats, saying the banks were simply made aware of the stakes involved.
Responding to concerns over delays in finalizing term sheets, a senior official remarked, “This is a massive and unprecedented financial transaction — naturally, some details required time to finalize.”
Background: Of the total circular debt, nearly Rs 700 billion is already held by PHL on behalf of power distribution companies (Discos). The new loan will allow the government to retire these liabilities and unlock liquidity in the power sector.
While the loan deal may offer short-term fiscal breathing room, experts warn that structural reforms in the energy sector remain critical to prevent future debt accumulation.
