Banks seal Rs1.2 trillion circular debt deal
Banks have mostly utilised deposits for safe lending to the government, instead of extending financing to the private sector to support business activities. PHOTO: file
In a landmark move for Pakistan's energy sector, the banking industry, under the Pakistan Banks Association (PBA), has led a record Rs1.225 trillion restructuring and financing agreement to ease the country's crippling circular debt burden.
According to an official statement issued on Wednesday, the signing ceremony at the prime minister's house was hailed as a breakthrough in tackling the circular debt crisis, which has strained the energy supply chain, shaken investor confidence, and swelled to nearly Rs2.4 trillion — 2.1% of GDP.
Eighteen leading banks participated in the agreement. PBA worked closely with the Ministry of Finance, Ministry of Energy, the State Bank of Pakistan (SBP), and the Central Power Purchasing Agency (CPPA) to build consensus on regulatory and financial hurdles. The restructuring is described as one of the most significant financial transactions in Pakistan's history.
The arrangement includes Rs659.6 billion in restructuring of existing loans on banks' books and Rs565.4 billion in fresh financing to clear overdue government payments to power producers. The release of sovereign guarantees worth Rs660 billion will unlock liquidity, enabling banks to inject financing into agriculture, SMEs, housing, education, and healthcare.
The cashflow-backed structure adds no new burden on the government or consumers. Instead, the existing Rs3.23 per unit debt service surcharge will be redirected toward repayment. Loans will be priced at KIBOR minus 90 basis points — around 150 basis points lower than the current rate. This concession reflects banks' willingness to absorb reduced earnings to make the transaction viable.
PBA Chairman Zafar Masud said the agreement reaffirmed the sector's role as a partner in national development. "This transaction is not just about numbers; it is about reaffirming the banking industry's role as an equal partner in Pakistan's economic development. The resolution of the circular debt stock reflects PBA's commitment to nation-building and shows what can be achieved when the public and private sectors work together with shared vision," he said.
Officials noted that the agreement provides a template for solving structural challenges through innovation and collaboration. By joining hands with the government, the banking sector has positioned itself as a trusted partner in delivering sustainable solutions and setting new standards for prudent fiscal management and public-private cooperation.