Cabinet okays circular debt reduction deal with Banks

ISLAMABAD: The Federal Cabinet on Wednesday cleared the long-awaited deal between approximately 18 commercial banks and Government of Pakistan (GoP) for a historic Rs 1.275 trillion loan after intensive negotiations over each clause.
The 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 683 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.
This measure will not place any additional financial burden on the national treasury.
Under the plan approved by the cabinet, Rs. 683 billion in financing will be used to pay the outstanding dues of the Power Holding Company. The loan will be repaid in 24 semi-annual installments. An annual repayment limit of Rs. 323 billion has been set, while in case of higher future rates, the total repayment limit has been set at Rs. 1.938 trillion.
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.
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).
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