In a move hailed as a milestone for Pakistan’s financial and energy landscape, the country’s banking industry has orchestrated a record Rs. 1.225 trillion restructuring and financing agreement to address the chronic circular debt crisis. The initiative, spearheaded by the Pakistan Banks Association (PBA), demonstrates unprecedented collaboration between banks, regulators, and government institutions, marking one of the largest financial restructurings in the nation’s history.
The signing ceremony, held at the Prime Minister’s House in Islamabad, symbolized a critical breakthrough in tackling Pakistan’s long-standing circular debt challenge, which has swelled to nearly Rs. 2.4 trillion, or about 2.1 percent of the national GDP. The mounting debt has strained the energy supply chain, disrupted cash flows to power producers, and eroded investor confidence in the sector.
The agreement was made possible through the active involvement of 18 major banks working closely with the Ministry of Finance, the Ministry of Energy (Power Division), the State Bank of Pakistan (SBP), and the Central Power Purchasing Agency (CPPA). The PBA played a pivotal role in forging consensus on complex regulatory and financial issues, ensuring the success of a transaction that not only supports the energy sector but also safeguards broader economic stability.
The deal is structured around two core components: the restructuring of Rs. 659.6 billion worth of loans already reflected in banks’ balance sheets, and the provision of Rs. 565.4 billion in fresh financing to clear the government’s overdue obligations to power producers. This dual arrangement is expected to provide fiscal relief, restore investor confidence, and create a stronger foundation for future energy sector reforms.
A notable aspect of the transaction is the release of sovereign guarantees valued at Rs. 660 billion. This measure will free up liquidity in the banking sector, enabling lenders to channel fresh financing into other vital areas of the economy, such as agriculture, SMEs, affordable housing, education, and healthcare. By redirecting capital to these sectors, the agreement has the potential to generate multiplier effects that go beyond the immediate resolution of circular debt.
The structure of the facility is also designed to minimize the burden on both the government and end consumers. Instead of introducing new surcharges, the existing Rs. 3.23 per unit debt service surcharge will be diverted toward repayment. The financing terms are equally significant, with the facility priced at a floating rate of KIBOR minus 90 basis points, making it approximately 150 basis points cheaper than current loan rates. This concession reflects the willingness of the banking industry to absorb reduced margins in favor of long-term national benefit.
Speaking on the importance of the agreement, Zafar Masud, Chairman of the PBA, remarked, “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 through this unprecedented restructuring and financing reflects PBA’s commitment to nation-building and economic prosperity. It also shows what can be achieved when the public and private sectors work together with shared vision and purpose.”
This landmark agreement is being seen as a model for addressing other deep-rooted structural challenges in Pakistan’s economy. By combining innovation, fiscal discipline, and cross-sector collaboration, the banking industry and government have set a precedent for tackling complex issues through partnership and collective responsibility.
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