Govt.strikes landmark deals with Banks to tackle mounting power sector circular debt

ISLAMABAD – The Power Division and approximately 18 commercial banks have reached an agreement on the term sheets for a historic Rs 1.275 trillion loan after intensive negotiations over each clause, well-informed sources told Newzshewz.
This loan is aimed at offsetting a portion of the circular debt, which currently stands at around Rs 2.4 trillion. The government has already secured the International Monetary Fund’s (IMF) approval for its circular debt reduction plan, which involves borrowing from commercial banks. Of the total debt, approximately Rs 700 billion is already held on the books of the Power Holding Company Limited (PHL) on behalf of the power distribution companies (Discos).
As part of the agreement, commercial banks will extend fresh loans of Rs 617 billion at an interest rate of 10.50–11 percent, pegged to the Karachi Interbank Offered Rate (KIBOR) minus 0.90 basis points. The repayment will be made over six years through the Debt Service Surcharge (DSS), currently charged to consumers at Rs 3.23 per unit in their electricity bills.
“We have finalized the term sheets with the banks. Now the necessary documentation is underway before the final agreements are signed, subject to federal cabinet approval,” a source said.
Earlier, reports indicated that the banks had requested a guarantee from the State Bank of Pakistan in case the government failed to meet its obligations. Insiders revealed that government negotiators had subtly reminded the banks that if the power sector were to collapse, their investments would be at risk—an implied warning intended to push banks toward agreement. However, an official denied any threats, saying banks were simply urged to understand the gravity of the situation.
When asked about delays in finalizing the term sheets, one key stakeholder dismissed the notion. “There is no delay. We’re just sorting out the final details. This is a massive, unprecedented transaction in Pakistan, so naturally, many aspects need to be finalized,” he stated.
Commenting further, he added, “April 30 is just around the corner. Whether or not everything concludes by then remains to be seen, but we’re very close.”
Another senior official involved in the debt-reduction initiative confirmed that all matters with the banks have been resolved. “The indicative term sheet was signed by all banks last week. It now awaits approvals from the federal cabinet and the CPPA-G Board. A summary will be moved to the cabinet next week, after which loan documentation will be finalized within three to four weeks,” he explained.
The official added that loan disbursements from the banks are expected by the end of next month, following cabinet approval of the agreements.
According to official documents, the government has committed to the IMF that Rs 1.252 trillion will be borrowed from banks to repay all outstanding PHL loans (Rs 683 billion) and to settle the remaining interest-bearing arrears owed to power producers (Rs 569 billion).
The loan is expected to be obtained at a rate more favorable than that currently applied to the circular debt stock—one of the key contributors to the flow and accumulation of circular debt. The repayments will be made over six years through DSS collections.
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