Govt secures historic Rs1.275trn loan deal from banks

MUSHTAQ GHUMMAN

ISLAMABAD: After months of negotiations on term sheets and legal formalities, the government has finalized agreements for a historic loan package of Rs 1.275 trillion with approximately 18 commercial banks to address the growing circular debt in the power sector.

According to sources, the draft agreements are now ready for final approval by the Federal Cabinet.

The loan aims to offset a portion of the circular debt, which currently stands at approximately Rs 2.3 trillion. The government has already secured the International Monetary Fund’s (IMF) endorsement for its circular debt reduction plan, which includes borrowing from commercial banks. Of the total debt, around Rs 700 billion is currently held on the books of the Power Holding Company Limited (PHL) on behalf of the power distribution companies (Discos).

During ongoing discussions with the IMF Review Mission, both the Finance Division and the Power Division briefed the mission on the status of negotiations with commercial banks and the terms outlined in the draft agreements.

Under the deal, commercial banks will extend fresh loans amounting to Rs 617 billion at an interest rate of 10.50–11 percent, pegged to the Karachi Interbank Offered Rate (KIBOR) minus 0.2 percent. Repayments will be made over six years through the Debt Service Surcharge (DSS), which is currently charged to consumers at Rs 3.23 per unit in electricity bills.

To meet IMF structural benchmarks, the government also plans to uncap the DSS, which currently represents 10 percent of the total revenue of power companies. This will be done through a legislative amendment, enabling the payment of interest and partial repayments of loans raised by PHL that appear on Discos’ balance sheets.

“We have finalized all necessary documentation and term sheets with the banks, and these are expected to be approved before Eid (this week),” a source confirmed.

Earlier reports suggested that commercial banks had requested guarantees from the State Bank of Pakistan in case of government default. However, sources indicated that government negotiators emphasized the systemic risk to banks’ investments if the power sector were to collapse—an implied warning rather than a direct threat. A government official denied any coercion, stating that banks were merely urged to recognize the severity of the situation.

“This is a massive, unprecedented transaction in Pakistan, so naturally, many aspects needed to be carefully finalized,” the official said.

Another senior official involved in the initiative confirmed that all outstanding matters with the banks have been resolved. “The indicative term sheet was signed by all banks last week. It now awaits approvals from the federal cabinet and the CPPA-G Board. A summary will be submitted to the cabinet next week, after which the loan documentation will be completed within three to four weeks,” he explained.

Loan disbursements are expected before the end of the current month so that reduced figures of circular debts are shown in the budget documents.

According to official documents, the government has committed to borrowing Rs 1.252 trillion from commercial banks to repay all outstanding PHL loans (Rs 683 billion) and settle the remaining interest-bearing arrears owed to power producers (Rs 569 billion).

The loan is expected to be secured at more favourable terms than those currently applied to the existing circular debt—one of the primary factors contributing to its accumulation. Repayments will be made over six years through DSS collections.