Rs1.225tr circular debt deal signed with banking sector

ISLAMABAD: In a landmark development for Pakistan’s energy and financial sectors, the country’s banking industry, led by the Pakistan Banks’ Association (PBA), has successfully orchestrated a record Rs1.225 trillion financial restructuring and financing transaction to address the mounting circular debt crisis.

The agreement, signed during a high-profile ceremony at the Prime Minister’s House, 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.

The circular debt—a persistent challenge that has crippled the energy sector, undermined investor confidence, and ballooned to nearly Rs2.4trillion (approximately 2.1pc of GDP)—has long required urgent structural reform. This deal, finalised through months of intensive collaboration between the PBA, 18 of the country’s top banks, the Ministry of Finance, Ministry of Energy (Power Division), the State Bank of Pakistan, and the Central Power Purchasing Agency, is being hailed as a breakthrough.

According to the official statement, the transaction is structured around two key components Rs659.6 billion in the restructuring of existing loans already held by banks, and Rs565.4 billion in fresh financing to settle overdue government payments to independent power producers (IPPs). This dual approach not only alleviates immediate liquidity pressure on the power sector but also allows the government to renegotiate better financial terms and achieve meaningful fiscal savings.

What sets this arrangement apart is its innovative and sustainable design. The financing facility does not impose any new burden on the government or electricity consumers. Instead, it repurposes the existing Rs3.23 per unit debt servicing surcharge to fund repayments, ensuring transparency and predictability. Moreover, the facility is offered on concessional terms—at a floating rate of KIBOR minus 90 basis points—significantly below the rates of previous loans. This pricing signals a clear willingness by the banking sector to prioritise national interest over short-term profitability.

In addition to relieving energy sector stress, the transaction also unlocks Rs660 billion worth of sovereign guarantees, releasing much-needed liquidity into the banking system. These funds are expected to be redirected toward strategic sectors such as agriculture, small and medium enterprises (SMEs), affordable housing, education, and healthcare — offering a broader economic stimulus beyond the energy domain.

Zafar Masud, Chairman of the PBA, emphasised the wider significance of the agreement, stating: “This transaction is not just about numbers. It represents the banking industry’s commitment to being a true partner in Pakistan’s development. By working closely with the public sector, we have demonstrated what can be achieved through a shared vision and collective responsibility.”