SEO Title: State Bank policy rate hike to increase financing costs for CPPA-G circular debt loans Meta Description: The State Bank of Pakistan’s recent 100-basis-point interest rate hike is set to raise the annual repayment burden for CPPA-G by billions while the government maintains current power surcharges. Tags: state bank of pakistan, policy rate hike, cppa g, circular debt pakistan, electricity prices, imf pakistan, power sector debt, kibor rates, financial reforms Date: 5 May, 2026 Category: Economy
The recent decision by the State Bank of Pakistan to increase the policy rate by 100 basis points is expected to have a direct fiscal impact on the Central Power Purchasing Agency (Guarantee) Limited. This adjustment in the monetary policy is projected to elevate the financial costs associated with a massive 1.225 trillion rupee financing facility that was specifically secured to manage the persistent circular debt within the national power sector. According to reports from Business Recorder, the increase in interest rates will tighten the financial breathing room for the agency as it manages high-value loans previously restructured to stabilize the energy supply chain. Officials have indicated that this impact is tied to a six-year financing arrangement involving eighteen major commercial banks, which was set at a rate of KIBOR minus 90 basis points.
This extensive financing package includes 659.6 billion rupees in restructured loans that were already present on bank balance sheets alongside 565.4 billion rupees in fresh liquidity. The funds were primarily utilized to retire older debts amounting to 659 billion rupees that were previously held by Power Holding Limited. Financial analysts and government officials estimate that every one percent increase in the benchmark interest rate could potentially raise the annual repayment burden for CPPA-G by approximately 12 to 13 billion rupees. Despite this substantial rise in debt servicing requirements, authorities have clarified that the current Debt Service Surcharge (DSS) of 3.23 rupees per unit levied on electricity consumers is not expected to see an immediate change.
The structure of these loans remains a focal point for the power sector management strategy. One official highlighted that while the increase will certainly affect the volume of repayments flowing back to the commercial banks, it will not be directly passed on to the general public through higher electricity tariffs at this stage. Another perspective from within the department suggests that because the loans are linked to a floating rate of KIBOR minus 90 basis points, the immediate financial shock may be somewhat mitigated, although the long-term effects of a high interest rate environment cannot be entirely dismissed. The list of participating financial institutions is extensive, including major players such as Habib Bank Limited, Meezan Bank Limited, National Bank of Pakistan, and various other commercial and Islamic banks operating within the country.
In tandem with these local adjustments, the International Monetary Fund (IMF) has noted that Pakistan is moving forward with a strategic plan to convert up to 80 percent of its existing circular debt stock into a new Sukuk structure. This transition is intended to address payment arrears more efficiently and significantly reduce the interest costs that have historically contributed to the rapid accumulation of circular debt. The IMF has emphasized that this restructuring could help the government meet lower debt flow targets through the fiscal year 2031 by creating a more sustainable repayment schedule. The fund has also recommended that all payments under this new arrangement be financed through the existing Debt Service Surcharge mechanisms.
Previously, the International Monetary Fund had suggested removing the cap on the surcharge to allow for more flexible adjustments if economic conditions worsened. However, the Pakistani government has opted to maintain the Debt Service Surcharge at the current level of 3.23 rupees per unit. This decision followed detailed discussions with the fund where it was concluded that additional increases might not be necessary to service the 1.225 trillion rupee facility over its intended tenure. The balancing act between meeting international financial obligations and protecting domestic consumers remains a primary challenge for the Energy Ministry as it navigates the complexities of fiscal policy and power sector reforms in 2026.
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