On Wednesday, the government signed loan agreements totaling approximately Rs1.225 trillion with 18 banks to settle the outstanding dues owed to Independent Power Producers (IPPs) that have accumulated as circular debt. This debt will be paid off through a Rs3.23 per unit surcharge on consumers over a period of six years.
The signing ceremony took place at the Prime Minister’s Office, with the premier attending virtually from New York. Although no formal announcement was initially made, ministers confirmed the agreement had been signed. Under the terms, the government has 30 days to request disbursements from the banks to ensure timely utilization and avoid penalties.
Today, the ceremony was broadcast on television, where both the prime minister and the finance minister addressed the audience.
In his remarks, Finance Minister Aurangzeb said the facility “resolves the structural issues of the power sector.”
He called it a “win-win situation,” stating, “Ultimately, it’s all for the benefit of Pakistan and the benefit of the consumers.”
Praising the efforts of the authorities involved, the finance minister remarked, “This is a very important step in reducing the energy equation.”
Echoing the minister’s sentiments, PM Shehbaz called the facility a “huge success,” noting that “circular debt was eating up all our resources.”
The premier acknowledged that negotiating with IPPs was a “big challenge” but that the team “lived up to their responsibility at the right time.”
He also thanked Army Chief Field Marshal Syed Asim Munir for his “behind-the-scenes support.” Outlining future steps, PM Shehbaz said the power sector’s next goals include the privatization of power distribution companies and addressing line losses.
He added, “These are big challenges that we have to take on with faith.”
Power Minister Awais Leghari, speaking at the ceremony, called the move a “bold step,” pointing out that “circular debt has burdened the energy sector for a long time.”
Leghari added, “The circular debt financing scheme is another landmark initiative to restore the health of our power sector.”
‘A Major Breakthrough’
In a separate press release issued Thursday, the Ministry of Finance quoted Aurangzeb as calling the agreement a step toward “restoring fiscal discipline, investor confidence, and energy sector sustainability.”
The press release stated that the success of the agreement “sets a precedent for addressing Pakistan’s structural challenges with innovation, unity and resolve.”
In the statement, the finance minister noted that the “release of Rs660 billion in sovereign guarantees through this arrangement will channel much-needed liquidity into priority sectors such as agriculture, small and medium enterprises, housing, education, and healthcare.”
The ministry’s statement hailed the “historic joint effort,” calling it a “major breakthrough in addressing one of the most chronic challenges of Pakistan’s energy sector.”
Under the facility, the Rs1.225 trillion debt will be serviced through a Debt Service Surcharge (DSS) of Rs3.23 per unit. Of this amount, Rs659 billion will be used for loans payable by Power Holding Ltd (PHL), a subsidiary of the Power Division. The remaining Rs556 billion will be used to pay dues to IPPs, petroleum sector entities, and for subsidy adjustments through both book and cash settlements.
The Ministry of Finance facilitated the loan agreements with 18 banks, including Habib Bank, Meezan Bank, National Bank of Pakistan, Allied Bank Ltd, United Bank Ltd, Faysal Bank Ltd, Bank Al Habib Ltd, MCB Bank Ltd, Bank Alfalah, Dubai Islamic Bank, Bank of Punjab, BankIslami Pakistan, Askari Bank Ltd, Habib Metropolitan Bank, Al Baraka Bank Ltd, Bank of Khyber, MCB Islamic Bank, and Soneri Bank.
With little reform and a stock of over Rs4.6 trillion in circular debt, Pakistan’s energy sector continues to heavily burden its economy due to weak collections, theft, poor infrastructure, governance issues, and market inefficiencies.
According to the Washington-based Institute of International Finance (IIF), “there is about 4% of GDP worth of debt stemming from the energy sector. The repercussion of this debt reverberates throughout the economy, not only impacting the fiscal but also growth, inflation, the external balance, and the financial sector.”
It noted that circular debt and energy subsidies add significant pressure to public finances, contributing to persistent fiscal imbalances and forcing the government to divert resources away from other investments, social programs, and infrastructure projects, thereby crowding out the private sector.
