Mir Nejib ur Rahman
Another year, another circular debt headline. But this time, something different has happened. For the first time in years, Pakistan’s power sector has seen a significant resolution of circular debt stock, even if the flow remains a looming threat. Recent Power Division data shows circular debt at Rs 2.396 trillion as of March 2025, a marginal increase since July last year, and Rs 398 billion lower than March 2024. This is no small feat for a system accustomed to perpetual bleeding.
Credit where it is due: the government has taken tough steps to control leakages, enforce cash flow discipline, and ring-fence funds to repay sector debt. The Finance Ministry’s decision to redirect the Rs 3.23/kWh Debt Service Surcharge (DSS) solely towards debt reduction, rather than letting it disappear into the general pool, reflects fiscal prudence.
Zafar Masud, Chairman of the Pakistan Banks Association (PBA), recently highlighted that this time, reforms go beyond temporary bailouts. There is an emerging focus on plugging systemic leakages, enforcing timely payments across the supply chain, and rethinking subsidy structures to reach the vulnerable without distorting the entire revenue cycle. Enhanced governance in DISCOs and technology-led oversight using digital monitoring tools are being rolled out to reduce theft and line losses, chronic ailments that have plagued the sector for decades.
However, let’s be clear: this is not the end, only a breather. NEPRA warns that average utilization of our 45,888 MW installed capacity remains just 34 percent, and even peak utilization is a mere 56 percent. Consumers continue to pay for idle capacity while distribution companies remain plagued by infrastructure decay, theft, inflated billing, and dismal recoveries. Without addressing these legacy issues, including both infrastructure upgrades and efficient collections, we will soon find ourselves back at square one.
What makes this circular debt resolution truly historic is its scale and execution. It involved Rs 683 billion as the largest-ever restructuring of government debt sitting on bank balance sheets, combined with Rs 612 billion as the largest fresh syndicated financing ever raised independently. Collectively, this has become the largest banking transaction in Pakistan’s history, by leaps and bounds, nearly 4.5 times bigger than the previous largest transaction.
This was not only the largest, but perhaps the quickest execution ever of such a complex, multi-stakeholder financial transaction. The banking industry stepped up, taking a larger view of economic revival, knowing that healthier power sector cash flows will reduce financial risks and unlock growth opportunities for banks themselves.
Banks agreed to a 150-basis-point reduction in their rate, bringing the new facility to KIBOR minus 90 bps. If rates fall, repayments will accelerate, potentially clearing this debt within four to six years. This frees up bank balance sheets, releases sovereign guarantee headroom for priority sector financing, and revives liquidity within the power sector itself. Power companies now have the room to invest in upgrades, efficiency, and financial discipline, while banks can redeploy freed capital into productive lending for SMEs, agriculture, green energy, and industrial revival. This is the kind of systemic fix that supports economic growth directly and indirectly.
To bring all partners together, the PBA played a central and strategic role, building consensus, aligning stakeholder interests, and ensuring this was not just a transaction but a transformative milestone.
The government’s role has also been critical in enforcing discipline, but it is the collaborative spirit between the government, banks, and regulators that has created this breather. For the first time in years, there is visible alignment to move from crisis management to long-term planning.
But let us be clear-eyed: the real battle is far from over. While the stock has been resolved at this point in time, the flow must stop and remain stopped going into the future. If we lose momentum, if governance reforms stall, if privatization of DISCOs remains shelved, if distribution efficiency improvements and collections falter, we will end up back where we started. Circular debt is not a disease in itself; it is a symptom of a broken system.
Today, we have bought time. This is a positive step in a journey that must continue with unrelenting focus. The power sector crisis was not created overnight, nor will it be resolved overnight. But for the first time in a long while, there is a sense of shared responsibility, decisive action, and cautious hope.
Let us not lose the momentum. The real work has just commenced.
(The writer is advisor — Pakistan Banks Association)
