Pakistan will sign a Rs1.275 trillion financing agreement today (Wednesday) with a consortium of 18 commercial banks in a bid to bring down the country’s spiraling circular debt in the power sector, sources have revealed.
An official invitation issued by the Central Power Purchasing Agency (Guarantee) Limited (CPPA-G) states that the repayment burden will fall on electricity consumers, who are already paying a surcharge of Rs3.23 per unit on their monthly bills, The News reported.
The signing, reportedly scheduled at the Prime Minister’s Office, is a centrepiece of Pakistan’s $7 billion International Monetary Fund (IMF) programme, which requires stringent energy sector reforms and long-term fiscal discipline. Prime Minister Shehbaz Sharif, currently attending the UN General Assembly session in New York, will join the ceremony virtually, highlighting the political importance attached to the initiative.
Sources said that the financing package is designed to permanently retire legacy debts without burdening the national exchequer. Under the plan, commercial banks will extend Rs617 billion in fresh loans at a concessional rate of KIBOR minus 0.90 basis points, to be repaid in 24 equal quarterly instalments over six years. The effective interest rate is expected to range between 10.50% and 11.5%. The repayment will be funded through the existing debt service surcharge collected from consumers, generating Rs323 billion annually.
Of the Rs1.275 trillion facility, Rs683 billion will clear the liabilities of the Power Holding Company (PHL), while Rs592 billion will settle arrears of Independent Power Producers (IPPs). In mid-June 2025, the federal cabinet approved the plan, describing it as a record achievement for securing financing below the three-month KIBOR benchmark.
Officials state that the move will help stabilise Pakistan’s fragile power sector by easing liquidity pressures and reducing reliance on emergency budgetary support. However, with the circular debt stock standing at Rs1.66 trillion by the end of July 2025, the challenge of containing future build-ups remains daunting.
The substantial loan package is intended to significantly reduce the country’s circular debt stock, bringing it down from Rs1.614 trillion to just Rs339 billion. This follows months of intensive negotiations and financial restructuring spearheaded by the government’s Task Force on Power, which has already led to a notable decline in circular debt from a peak of Rs2.381 trillion earlier this year.
To recover the loan over the next six years, a debt service surcharge (DSS) of Rs3.23 per unit has been embedded in the electricity tariff. Government officials clarified that this surcharge is already in effect and will remain in place throughout the repayment period. Although the DSS previously faced a 10% cap, the ceiling has now been lifted to fulfil structural benchmarks under the ongoing IMF programme. However, authorities emphasised that there are no immediate plans to raise the surcharge rate further.
The commercial banks will deduct the surcharge amount at source when collecting electricity bill payments from consumers. Unlike a previous loan of Rs658 billion extended to the power sector under government guarantee, the current financing arrangement does not involve a sovereign guarantee. Instead, the loan is extended directly to CPPA, backed by the power sector’s substantial receivables, marking a significant shift in risk-sharing and financial responsibility. The CPPA’s Board of Directors has already approved the revised terms in collaboration with the participating banks.
The government has also reduced its initially proposed loan amount from Rs1.275 trillion to Rs1.225 trillion after PHL settled part of its liabilities and cleared several key payments. The restructuring process was further supported by the termination of six non-performing IPP contracts, waivers amounting to Rs387 billion in late payment interest (LPI), and the clearance of Rs348 billion in outstanding arrears — of which Rs127 billion was paid through budgeted subsidies and Rs221 billion by CPPA directly.
Once the Rs1.225 trillion loan is fully disbursed, officials expect the remaining circular debt of Rs339 billion to be addressed through additional reforms and efficiency improvements in power distribution companies (Discos).
The high-profile signing ceremony will be attended by top government functionaries, including Deputy Prime Minister Ishaq Dar, federal ministers for power, finance, economic affairs, petroleum, planning and information technology, along with the governor of the State Bank of Pakistan, chairman of the National Electric Power Regulatory Authority, and country heads of IMF, World Bank, and Asian Development Bank. Chief executives from CPPA-G, PHL, and Discos, including Lesco, Mepco, Pesco, Hesco, and others will also be present. Senior representatives from 18 commercial banks involved, including HBL, NBP, UBL, MCB, Meezan Bank, and Bank Alfalah, will witness the formalisation of the agreement.
This strategic financial intervention is seen as a pivotal step towards restoring fiscal discipline in the power sector, fulfilling IMF programme commitments, and setting the stage for broader energy sector reforms.