Islamabad, June 19, 2025 – In a significant development aimed at addressing Pakistan’s chronic power sector woes, the federal cabinet has approved a massive Rs 1.275 trillion loan package to reduce the ballooning circular debt.
The decision reflects a strategic policy shift to permanently address structural inefficiencies rather than continuing to manage the circular debt through temporary adjustments.
Official sources confirmed that the government will secure the Rs 1.275 trillion financing from commercial banks at an interest rate 0.9 percent lower than the prevailing three-month KIBOR (Karachi Interbank Offered Rate). The move is intended to provide low-cost liquidity to ease the financial burden of power sector liabilities.
This financing package is being hailed as the first serious step toward reversing the accumulation of circular debt, which has long plagued the energy sector. Unlike past practices where circular debt levels were capped or rolled over, the new approach involves actively retiring the debt stock. A substantial portion of the borrowed funds will be used to pay off outstanding dues to Independent Power Producers (IPPs) and settle liabilities owed by the Power Holding Company.
Out of the total loan, Rs 683 billion has been earmarked specifically to clear arrears of the Power Holding Company. The government aims to implement the repayment through 24 equal quarterly installments over a period of six years. Each installment will carry a concessional interest rate and will not exert additional strain on the national budget.
The Ministry of Finance has set an annual repayment cap of Rs 323 billion to ensure fiscal sustainability. Furthermore, a safeguard ceiling of Rs 1.938 trillion has been included in case interest rates rise during the loan term, thereby protecting against unforeseen financial shocks.
Pakistan’s persistent circular debt has long been a drag on the economy, leading to power outages and discouraging investment. This structured bank financing marks a decisive step toward stabilizing the sector. If successfully implemented, the plan could help break the cycle of circular debt accumulation and restore financial discipline in the country’s energy framework.