ISLAMABAD: The recent increase of 100 basis points in the policy rate by the State Bank of Pakistan (SBP) is likely to raise the financial liability of the Central Power Purchasing Agency–Guaranteed (CPPA-G) on loans amounting to Rs 1.225 trillion, obtained from commercial banks to retire circular debt in the power sector.
However, the hike is not expected to affect the Debt Service Surcharge (DSS) of Rs 3.23 per unit, well-informed sources told Business Recorder.
The Rs1.225 trillion financing facility, arranged from 18 banks, was secured for a six-year period at a rate of KIBOR minus 90 basis points. The facility was also used to retire earlier loans worth Rs 659 billion obtained by Power Holding Limited (PHL).
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The overall arrangement included Rs 659.6 billion in restructured loans already on banks’ balance sheets, along with Rs 565.4 billion in fresh financing. This enabled the government to clear overdue payments to power producers, negotiate improved terms, and achieve meaningful fiscal savings.
The participating banks included Habib Bank Limited, Meezan Bank Limited, National Bank of Pakistan, Allied Bank Limited, United Bank Limited, Faysal Bank Limited, Bank AL Habib Limited, MCB Bank Limited, Bank Alfalah Limited, Dubai Islamic Bank Pakistan Limited, The Bank of Punjab, BankIslami Pakistan Limited, Askari Bank Limited, Habib Metropolitan Bank Limited, Al Baraka Bank (Pakistan) Limited, Bank of Khyber, MCB Islamic Bank Limited, and Soneri Bank Limited.
According to estimates, a 1 percent increase in the interest rate on Rs 1.225 trillion would result in an additional annual cost of approximately Rs 12–13 billion for CPPA-G. However, it remains unclear whether this additional burden will be passed on to electricity consumers.
“One percent increase in interest rates will affect the repayment liabilities to banks, but it will not have any impact on electricity consumers,” an official said on condition of anonymity.
Another official, however, maintained that since the loans are linked to KIBOR minus 90 basis points, there may be no immediate additional liability for CPPA-G, although the future impact cannot be ruled out.
In its May 2025 Staff Report on the first review under the Extended Fund Facility (EFF), the International Monetary Fund (IMF) noted that the authorities are implementing a plan to convert up to 80 percent of the existing circular debt stock—primarily CPPA payment arrears—into CPPA debt through a new Sukuk. Given relatively lower interest rates, this move is expected to reduce the financial burden on the power sector.
The IMF observed that the operation would significantly cut interest charges on arrears, which have accounted for nearly half of the circular debt flow in recent years. Consequently, circular debt targets have been set lower for the first half of FY2025-26, with expectations that the debt flow will continue to decline through FY2031, alongside a reduced need for power subsidies.
The Fund emphasised that, given limited fiscal space, all payments under this operation must be financed through the existing DSS. While DSS revenues are expected to be sufficient, the IMF had recommended removing the current cap on DSS (by end-June 2025) to allow adjustments if required to cover any shortfall.
However, the government has not uncapped the condition of Rs 3.23 per unit of DSS apparently after reaching an understanding with the Fund that there would be no need to increase the surcharge to retire the loans of Rs 1.225 trillion in six years’ duration.
Copyright Business Recorder, 2026
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