Circular debt financing deal: Will it benefit ordinary Pakistanis?

The federal government has signed a historic Rs1.225 trillion financing agreement with a consortium of 18 banks to address the country’s ballooning power sector circular debt. Finance Minister Aurangzeb has described signed transaction as the largest restructuring deal in country’s history.

The key question now is why this agreement is being called a game changer — and what it really means for ordinary Pakistanis. Will it bring down electricity costs, reduce the burden of circular debt, or improve the efficiency of the power sector?

To answer these questions, The Express Tribune unpacks the deal in simple, clear terms so readers can understand its real impact on daily life. To understand this, we first need to know what circular debt is — and how it has grown over time.

What is Circular Debt?

Circular debt refers to the financial shortfall in Pakistan’s energy sector, where various entities involved in electricity generation, supply, and distribution owe large amounts of money to each other. The problem is rooted in poor management, delayed payments, and inefficiencies in revenue collection.

The key players involved in this circular chain include the federal government, independent power producers, government-owned power supply companies, energy suppliers, and the financial institutions that finance the sector. These players often fail to pay one another on time, causing the debt to spiral out of control.

How Circular Debt Has Grown

Circular debt in Pakistan’s energy sector has grown significantly over the years due to several factors:

Low Recoveries & Theft: Power companies struggle to recover payments from consumers, and widespread theft further exacerbates financial losses. Unreimbursed Tariff Subsidies: The government has failed to fully compensate power companies for the tariff subsidies, increasing the debt burden.

Misaligned Billing Cycles: Billing inefficiencies and long delays in the collection process lead to a backlog of unpaid dues.

Capacity Payments: IPPs are required to make large capacity payments, regardless of whether electricity is generated or consumed. This contributes to the increasing debt as power plants get paid without generating enough electricity to cover costs.

As a result, the total circular debt has reached staggering amounts, leading to an unbalanced energy market where costs are passed down to consumers and institutions that are unable to meet their obligations.

What makes this circular debt agreement a big deal?

Pakistan’s power sector has long been crippled by circular debt — unpaid bills, subsidies, and delayed payments piling up across the system. By mid-2025, this debt had reached nearly Rs2.4 trillion, about 2.1% of GDP, choking growth.

To tackle this, the government has signed a record Rs1.225 trillion financing deal with 18 major banks. The loan is structured under Islamic finance principles and will be repaid through a surcharge already included in electricity bills, ensuring lenders are paid without adding new pressure on the budget.

Unlike past bailouts, this agreement offers a market-based, sustainable fix aimed at reviving struggling power companies and breaking the cycle of circular debt.

Key features of the scheme:

Financing amount: Rs1,225 billion

Markup: KIBOR – 0.90% (well below market terms) 

Tenor: Maximum 6 years

Repayment stream: Debt Service Surcharge (DSS) of Rs3.23/kWh

Innovative use of DSS: Not just covering financing costs, but also repaying principal.

Why is it a game changer?

This agreement is a game changer because of its scale, collaboration, and structure. At Rs1.2 trillion, it is the largest financing in Pakistan’s history, designed with strict repayment terms to enforce discipline. It also reflects an unprecedented collective effort.

Unlike past bailouts that fueled inflation and deficits, this is a market-based, transparent solution that channels private money into the energy sector.

Most importantly, it restores confidence by showing that Pakistan can deliver innovative, large-scale financial solutions — a model the country can apply to other systemic challenges.

How will it benefit ordinary Pakistanis?

Once the loan is fully repaid in 4–6 years, the extra surcharge of Rs3.23 per unit on electricity bills will be removed, lowering tariffs.

In the meantime, the cash flowing into the power sector will help reduce blackouts, fuel shortages, and sudden price hikes. By easing pressure on the government’s finances, the deal also helps keep inflation in check.

Over time, it can attract new investment in energy and renewables, making supply more reliable and affordable. For households, this means more stable electricity, more predictable bills, and a stronger economy overall.