In a major step toward addressing Pakistan’s persistent circular debt crisis in the power sector, the federal cabinet has approved a comprehensive financing plan involving a Rs 1.275 trillion loan from commercial banks at historically low interest rates.
Sources indicate that the government will secure the funds at an interest rate 0.9% below the historical three-month KIBOR benchmark, making it one of the most cost-effective borrowings in recent years.
This initiative represents a strategic departure from previous policies that focused on containing the circular debt at fixed levels. Instead, the new approach centers on gradually reducing the debt through structured financing.
For the first time, borrowed funds will be used to directly retire outstanding payments to Independent Power Producers (IPPs) and clear liabilities of the Power Holding Company, rather than just managing the existing debt stock.
Out of the total Rs 1.275 trillion, Rs 683 billion will be allocated to settle the Power Holding Company’s arrears. The loan will be repaid over six years in 24 equal quarterly installments, with each installment pegged at a rate 0.9% below the prevailing three-month KIBOR.
To manage fiscal risk, the government has imposed an annual repayment cap of Rs 323 billion, with a total ceiling of Rs 1.938 trillion in case of future interest rate fluctuations. The move is expected to provide long-term stability to the power sector without increasing the burden on the national budget.
