By Hasnain Ali
Pakistan has signed its largest-ever financing deal worth Rs1.225 trillion with 18 banks, aimed at tackling the country’s massive power sector debt.
The government says the deal will help clear unpaid bills to power producers and bring stability to the energy sector. But experts warn that without deep changes, it could just repeat the mistakes of past bailouts.
Under the agreement, Rs565 billion in new funds will pay off current debts to power producers. Another Rs660 billion in older loans, previously with Power Holding Limited, will be restructured.
The loans, with a six-year repayment plan, will be funded through a Rs3.23 per unit surcharge already added to electricity bills. The government recently removed a legal cap on such surcharges to allow this plan.
Pakistan Power Sector Debt
The power sector’s circular debt—money owed throughout the energy supply chain—remains one of Pakistan’s toughest economic challenges.
It affects growth, inflation, the financial sector, and the country’s external accounts. As of July 2025, circular debt reached Rs1.661 trillion, up Rs47 billion from the previous month.
According to Power Minister Awais Khan Leghari, circular debt dropped from Rs2.393 trillion last year thanks to Rs780 billion in fiscal space: Rs242 billion from lower electricity theft and better collections, Rs175 billion from falling interest rates, and Rs363 billion through revised power purchase agreements with Independent Power Producers (excluding Chinese CPEC projects).
Officials say the latest deal will save consumers Rs377 billion in late payment charges.
The faster the debt is cleared, the sooner the surcharge can be removed, lowering electricity prices for consumers.
Circular Debt in Pakistan: Lessons from the Past
This is not the first attempt to tackle circular debt. In 2013, the government injected Rs480 billion to clear power sector dues. But without fixing the underlying issues, the debt returned. Critics say that without long-term reforms, the cycle of bailouts could continue.
Banks agreed to accept a lower floating rate of Kibor minus 90 basis points, saving the government money on interest payments.
Sovereign guarantees have been removed, and the government’s interest liability is limited to what is collected through the Rs3.23 per unit surcharge. Banks also waived the usual minimum interest rate, offering favorable terms.
The plan allows early repayment if interest rates fall and electricity demand rises. If all goes as planned, the surcharge could be removed, potentially cutting electricity prices by up to 10%.
However, if borrowing costs increase or electricity use drops, the surcharge may need to rise to keep repayments on track.
Expert Opinions on the Power Debt Deal
Pakistan Banks’ Association chairman Zafar Masud called the deal a potential turning point. “Banks will finally get Rs660 billion in long-outstanding power loans. Consumers face no extra burden, and old and new debts can be cleared in four to six years depending on interest rates.
The government can now redirect freed funds to priority sectors like agriculture, education, and health,” he said.
Still, some experts caution that circular debt could build up again without structural reforms.
The Institute of International Finance (IIF) and the Federation of Pakistan Chambers of Commerce and Industry warned that repeated loans and bailouts are unsustainable unless power system losses, poor recoveries, and inefficiencies are addressed.
Another concern is the power sector’s exposure to currency risks. Many projects, especially Chinese CPEC investments totaling over 11,000 MW, were financed in dollars, leaving them vulnerable to currency depreciation.
Steps Toward Reform in Pakistan’s Power Sector
The government has taken measures to prevent misuse of funds, strengthen governance, and ensure the debt servicing surcharge is used exclusively for the power sector.
The PBA chairman noted that reforms now focus on reducing leaks, timely payments, and ensuring subsidies reach those who need them without disrupting revenue flows.
However, the key challenge remains: stopping new debt from piling up in the future.
Author Profile
