A consortium of 15 banks has agreed to lend the federal government Rs1,272 billion on concessional terms to address the ballooning circular debt, which currently stands at Rs2,531 billion, in a major step toward resolving Pakistan’s power sector woes.

According to sources, the loan agreement is expected to be signed today or tomorrow. The banks have accepted the government’s proposal to offer the loan at a markup rate 0.9% lower than the prevailing market rate. At present, the loan will be available at 11.4% interest, compared to the market rate of 12%.

The leading bank in the consortium is said to be Habib Bank, while the funds will be routed to the Central Power Purchasing Agency (CPPA) through the Power Holding Company. Initially, the agreement will cover a five-year term, with the possibility of extension.

Sources confirm that the purpose of this borrowing is to prevent further accumulation of circular debt, especially the interest portion, which has already reached Rs683 billion. Consumers currently bear the burden of this interest through a surcharge of Rs3.23 per unit. However, under the proposed scheme, this surcharge will eventually be phased out once the principal amount is paid.

Additionally, the government will contribute Rs111 billion to the Power Holding Company from its own fiscal space, while efforts to reduce disco inefficiencies and line losses are expected to yield savings of Rs190 billion, further stabilizing the sector.

Once the loan is disbursed and the planned financial restructuring is implemented, officials anticipate that the circular debt stock will be brought down to just Rs300 billion, significantly improving the overall health of Pakistan’s energy sector.