Key points
- Rs 1.225 trillion circular debt cleared, Rs 565 fresh financing secured
- Existing Rs 660 billion loans restructured, unlocking guarantees of equal amount
- Unlocked liquidity to be channelled to key sectors
ISLAMABAD: Pakistan said on Thursday it had cleared Rs1.225 trillion ($4.4 billion) in circular debt through a restructuring deal with local banks, a move officials said would stabilise the energy sector without raising electricity tariffs for consumers.
The package, which includes Rs565 billion in fresh financing and the restructuring of Rs660 billion in existing loans to clear overdue payments to power producers. That also unlocks sovereign guarantees to inject liquidity into priority sectors such as agriculture, SMEs, housing, education and healthcare.
The resolution was achieved through a historic joint effort led by the Prime Minister’s Task Force on Power, in coordination with the Ministry of Energy, the State Bank of Pakistan, the Pakistan Banks Association, and 18 partner banks, Pakistan ministry of finance said.
Importantly, the debt resolution introduces no new burden on consumers. Repayments will be serviced through the already levied surcharge of Rs 3.23 per unit, ensuring that electricity tariffs remain unchanged for consumers. This approach aligns with the government’s commitment to fiscal discipline and consumer protection.
While the restructuring offers major relief, the Ministry officials acknowledged that not all of the circular debt has been eliminated. The residual stock (estimates range between Rs 400–1,200 billion, depending on which of the base figures is used) will be managed through sectoral reforms, including improved recoveries, loss reduction, subsidy rationalisation, and tariff adjustments, rather than fresh borrowing.
The restructuring also unlocks Rs 660 billion in sovereign guarantees, which will channel liquidity into critical sectors like agriculture, small and medium enterprises (SMEs), housing, education, and healthcare. This move is expected to stimulate economic activity and support growth in areas vital to Pakistan’s development.
Federal Minister for Finance and Revenue, Senator Muhammad Aurangzeb, emphasised that this achievement marks a decisive step toward restoring fiscal discipline, investor confidence, and sustainability in the energy sector. He highlighted the broader significance of the resolution, noting that it sets a precedent for addressing Pakistan’s structural challenges with innovation, unity, and resolve.
The successful resolution of the circular debt underscores the government’s ability to balance financial stability with energy sector reforms, signalling a new era of responsible governance and economic resilience.
Circular debt in Pakistan’s power sector has been a persistent issue, arising from inefficiencies in electricity generation, transmission, and distribution. Factors contributing to the accumulation of circular debt include delayed payments by distribution companies, high generation costs, and inadequate tariff structures, according to researchers at the Pakistan Institute of Economics (PIDE)
The government’s earlier efforts to address this issue have included various measures, such as increasing electricity tariffs, improving bill recovery rates, and restructuring existing debts. The recent resolution of Rs1.225 trillion in circular debt represents a significant milestone in these ongoing efforts.
Unlocking guarantees
The government’s circular debt resolution released Rs 660 billion in sovereign guarantees. This means that funds previously tied up as guarantees to back power sector obligations are now freed, allowing the government and banks to redirect liquidity toward priority sectors such as agriculture, SMEs, housing, education, and healthcare. It essentially frees capital for productive use without creating new debt or additional charges for consumers.
Circular debt accumulates when electricity distribution companies fail to pay power producers on time, creating a chain of unpaid obligations in the entire energy sector. It is a longstanding issue in Pakistan, haunting financial stability and sector efficiency.
