ISLAMABAD: The Federal Cabinet on Wednesday approved a long-anticipated agreement between the Government of Pakistan (GoP) and approximately 18 commercial banks for a landmark Rs 1.275 trillion loan, following intense negotiations over each clause.
Sources in Power Division told Business Recorder, the loan aims to address a portion of the country’s ballooning circular debt, currently estimated at around Rs 2.4 trillion.
The International Monetary Fund (IMF) has already endorsed the government’s circular debt reduction plan, which includes borrowing from commercial banks. Of the total circular debt, about Rs 700 billion is already carried on the books of the Power Holding Company Limited (PHL), on behalf of the power distribution companies (Discos).
Rs1.275trn loan to tackle circular debt: CPPA-G likely to sign term sheets with 18 banks
Under the agreement, commercial banks will provide fresh loans amounting to Rs 683 billion at an interest rate of 10.5%–11%, pegged to the Karachi Inter-bank Offered Rate (KIBOR) minus 0.90 basis points. Repayment will be made over six years via the Debt Service Surcharge (DSS), which is currently charged to electricity consumers at Rs 3.23 per unit. Notably, this mechanism ensures there will be no additional burden on the national treasury.
According to the approved plan, the Rs 683 billion in financing will be used to clear PHL’s outstanding liabilities. Repayment will occur in 24 semi-annual installments, with an annual ceiling of Rs 323 billion. In the event of rising interest rates, the total repayment cap has been set at Rs 1.938 trillion.
Earlier reports suggested that banks had requested a guarantee from the State Bank of Pakistan in case the government defaulted. Sources familiar with the negotiations revealed that government representatives reminded the banks of the potential risks to their investments should the power sector collapse—an implicit warning aimed at expediting the deal. However, an official denied that any threats were made, stating that banks were simply asked to appreciate the seriousness of the situation.
In response to concerns about delays in finalizing the term sheets, one key stakeholder dismissed such claims. “There’s no delay—we’re just ironing out final details. This is a massive, unprecedented transaction in Pakistan, so it’s natural that many elements require careful attention,” the official said.
Official documents confirm that the government has committed to the IMF to borrow Rs 1.252 trillion from banks—Rs 683 billion to settle existing PHL loans, and Rs 569 billion to clear remaining interest-bearing arrears owed to power producers.
Copyright Business Recorder, 2025
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