By Staff Reporter
The government has signed loan agreements worth about Rs1.225 trillion with 18 local banks to clear outstanding dues to independent power producers trapped in the nation’s chronic circular debt, officials said.
The deals, finalised on Wednesday at the prime minister’s office in Islamabad, were witnessed virtually by the premier from New York. Ministers confirmed the signing, though no official announcement was issued.
The funds will be serviced over six years through a Rs3.23 per unit surcharge on electricity consumers, adding to the burden on households and businesses already grappling with high energy costs.
Under the terms, the government has 30 days to request disbursements from the banks to ensure prompt use and avoid penalties. Any unused withdrawal requests will lapse, and once approved, the funds must be drawn down within three months.
The Ministry of Finance orchestrated the agreements with lenders including Habib Bank Ltd., Meezan Bank Ltd., National Bank of Pakistan, Allied Bank Ltd., United Bank Ltd., Faysal Bank Ltd., Bank Al Habib Ltd., MCB Bank Ltd., Bank Alfalah Ltd., Dubai Islamic Bank Pakistan Ltd., Bank of Punjab, BankIslami Pakistan Ltd., Askari Bank Ltd., Habib Metropolitan Bank Ltd., Al Baraka Bank Pakistan Ltd., Bank of Khyber, MCB Islamic Bank Ltd. and Soneri Bank Ltd.
Of the total, Rs659 billion will cover loans payable by Power Holding Ltd., a shell subsidiary of the Power Division. The balance will settle dues to IPPs, petroleum sector entities and subsidy adjustments, including through book entries and cash payments.
The cabinet had pre-approved the facility and payment structure, designating the Central Power Purchasing Agency as agent for the distribution companies to handle public service obligations and circular debt financing under the State-Owned Enterprises Act.
Term sheets, guided by the Ministry of Finance and State Bank of Pakistan, set the loans at Kibor minus 9 percentage points for six years. Quarterly repayments are projected at Rs310 billion to Rs315 billion, based on estimated recoveries from the Rs3.23 per unit Debt Service Surcharge. An existing DSS, in place for five years on prior loans, was set to expire by end-June 2025 but will now extend for another six years. Total interest on the new facility is estimated at around Rs640 billion.
To enable this, amendments to Section 31(8) of the Nepra Act were included in the Finance Bill 2025-26, also lifting a 10% cap on the base tariff. The move comes as Pakistan’s power sector circular debt swelled to Rs1.661 trillion by end-July, up Rs47 billion that month alone. It had dipped to Rs2.393 trillion by end-June after utilizing Rs780 billion in fiscal space from subsidy allocations.
Critics warn the approach is unsustainable without broader fixes. The Washington-based Institute of International Finance and the Federation of Pakistan Chambers of Commerce and Industry have flagged the loans and fiscal injections as short-term patches, urging deep structural reforms to cut system losses, boost recoveries and tackle inefficiencies.
Amid scant progress on those fronts and a circular debt stock exceeding Rs4.6 trillion, the energy sector continues to drag on the economy through weak collections, theft, outdated infrastructure, governance lapses and market distortions. “Taken together, there is about 4pc 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,” the IIF said. It added that circular debt and energy subsidies exert significant pressure on public finances, fueling persistent fiscal imbalances and diverting resources from investments, social programs and infrastructure, while crowding out private sector activity.
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