EDITORIAL: The Rs1.225 trillion landmark circular debt restructuring finance deal, signed on September 25, could mark a seminal moment for the country’s power sector, addressing a structural flaw that has plagued the energy landscape for years.
Over the past two decades, the circular debt crisis has spiralled into an entangled web of mounting arrears, ill-targeted subsidies and chronic payment delays spanning the entire energy supply network. By the end of July, the power sector circular debt had ballooned to Rs1.661 trillion, with Rs47 billion piled on in that month alone.
Small wonder then that this never-ending quagmire had pushed the sector towards near-paralysis and saddled the broader economy with a crushing debt burden that was stifling growth.
Against this backdrop, the circular debt financing agreement signed between the federal government and a consortium of 18 major banks could potentially prove to be a watershed. While it is the largest structured facility ever arranged for the energy domain, its real value lies in signaling a shift away from ad hoc bailouts and short-term band aids towards a more durable, market-driven framework.
Unlike past rescue packages that fuelled inflation and strained public finances, it attempts to mobilise private liquidity into a more disciplined, transparent mechanism. Of the Rs1.225 trillion package, Rs659 billion will retire Power Holding Limited loans, with the rest settling dues of IPPs and state-run power producers.
The facility carries financing at KIBOR minus 0.9 percent – well below market terms — a six-year repayment period and will be serviced through Rs3.23/kWh Debt Service Surcharge (DSS).
The levy, which is already part of power bills and not a newly-imposed surcharge on consumers, will cover both financing costs of the facility as well as the principal amount.
If implemented as intended, the scheme could impose long-missing fiscal discipline on a sector addicted to rollovers and stopgap relief. The decision to compress repayment to within a six-year duration without the cushion of a grace period forces a seriousness of commitment that remained absent in past arrangements.
Consumers stand to gain Rs350 billion through the elimination of costly late-payment surcharges, while the carrying cost of circular debt and annual financing costs will each decline by 1.5 percent. And once the debt is cleared, the DSS surcharge can be scrapped, instantly easing electricity tariffs and delivering a rare, tangible win for consumers.
With the easing of the circular debt burden, increased liquidity should enable power producers and electricity distribution companies to operate with greater stability, curbing electricity outages, fuel shortfalls and sudden tariff shocks. This, in turn, would help contain inflation and relieve fiscal pressures on state coffers.
Moreover, if executed as planned, the facility could also restore confidence in the power sector, attract investments to generation, distribution and renewables, lower costs and ultimately lift Pakistani industry on to a higher growth plane after being bogged down for years by some of the highest cost structures in the region.
It is important to note, however, that while the financing deal could make a serious dent on the circular debt burden, lasting progress will still hinge on reforms in the power sector, long stalled by political apathy and bureaucratic inertia. Electricity theft, system losses, weak recoveries and the poor governance of distribution companies continue to fuel the problem.
Nepra’s State of Industry reports have repeatedly highlighted, for instance, how power theft and technical inefficiencies bleed away a sizeable share of purchased units from power producers, feeding directly into the circular debt spiral. It is imperative, therefore, to modernise a creaking transmission and distribution network and to institute genuine governance reforms in DISCOs to improve efficiency.
The financing deal could provide power sector entities with rare financial leeway that could help address some of these areas, and it is vital that this opportunity does not go begging.
Copyright Business Recorder, 2025
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