Govt seals Rs1.225tr deal to cut circular debt

Deal ‘largest financing’ in Pakistan’s history: Aurangzeb

ISLAMABAD: The federal government has signed a Rs 1.225 trillion financing agreement with a consortium of eighteen banks to address the country’s power sector circular debt.
The agreement, a major milestone for both the energy and financial sectors, was signed during a high-profile ceremony at the Prime Minister’s House. This marks one of the most significant financial interventions in the nation’s history and aims to restore fiscal balance, unlock growth and revive confidence in Pakistan’s economic management.
Prime Minister Shehbaz Sharif, who witnessed the signing ceremony through a video link from New York, described the agreement as a major achievement in addressing the growing problem of circular debt. He credited the relevant task force for its exemplary fulfillment of responsibilities.
Finance Minister Muhammad Aurangzeb has hailed the Rs1.2 trillion bank loan secured to settle Pakistan’s circular debt as the “largest financing and largest restructuring transaction” in the country’s history.
On Thursday, the signing ceremony was aired on television, with both the premier and the finance minister addressing the gathering.
In his remarks, Aurangzeb said that facility “resolves the structural issues of the power sector”.
“Ultimately, it’s all for the benefit of Pakistan and the benefit of the consumers,” he said, branding it a “win-win situation”.
Lauding the efforts of the authorities involved in arranging the loan facility, the finance minister remarked, “This is a very important step in reducing the energy equation.”
Echoing the minister’s thoughts, PM Shehbaz termed the facility a “huge success”, remarking that “circular debt was eating up all our resources”.
The premier noted that negotiating with IPPs was a “big challenge”, but the team “lived up to their responsibility at the right time.”
He also thanked Army Chief Field Marshal Syed Asim Munir for his “behind-the-scenes support”. Outlining future steps, PM Shehbaz said that the power sector’s next targets included privatisation of power distribution companies and dealing with line losses.
“These are big challenges that we have to take on with faith,” he added.
Speaking at the ceremony, Power Minister Awais Leghari called the move a “bold step”, pointing out that “circular debt has burdened the energy sector for a long time”.
“The circular debt financing scheme is another landmark initiative to restore the health of our power sector,” Leghari added.
Separately, in a press release issued by the Ministry of Finance on Thursday, Aurangzeb called the agreement a step towards “restoring fiscal discipline, investor confidence, and energy sector sustainability”.
The success of the agreement “sets a precedent for addressing Pakistan’s structural challenges with innovation, unity and resolve,” the press release quoted him as saying.
The finance minister, in the statement, maintained that “release of Rs660 billion in sovereign guarantees through this arrangement will channel much-needed liquidity into priority sectors such as agriculture, small and medium enterprises, housing, education, and healthcare”.
In its statement, the ministry hailed the “historic joint effort”, calling it a “major breakthrough in addressing one of the most chronic challenges of Pakistan’s energy sector”.
Under the facility, the servicing of the Rs1.225tr debt would be serviced through a Debt Service Surcharge (DSS) at the rate of Rs3.23 per unit. Of this, Rs659bn would be used for loans payable by Power Holding Ltd (PHL) — a shell subsidiary of the Power Division.
The remaining funds — 556bn — would be used to pay dues to IPPs, petroleum sector entities, and make subsidy adjustments, including through book adjustments and cash settlements.
The Ministry of Finance facilitated the loan agreements with 18 banks, including Habib Bank, Meezan Bank, National Bank of Pakistan, Allied Bank Ltd, United Bank Ltd, Faysal Bank Ltd, Bank Al Habib Ltd, MCB Bank Ltd, Bank Alfalah, Dubai Islamic Bank, Bank of Punjab, BankIslami Pakistan, Askari Bank Ltd, Habib Metropolitan Bank, Al Baraka Bank Ltd, Bank of Khyber, MCB Islamic Bank and Soneri Bank.
Amid little reform and a stock of over Rs4.6tr circular debt, Pakistan’s energy sector continues to weigh heavily on its economy across all sectors, owing to weak collections, theft, poor infrastructure, governance problems, and market inefficiencies. APP