In a landmark move to tackle the country’s mounting power sector circular debt, the federal government has finalized a massive Rs. 1.275 trillion loan agreement with 18 commercial banks. The deal, which aims to reduce the sector’s staggering Rs. 2.3 trillion circular debt has received the green light from the International Monetary Fund (IMF) and is now awaiting final approval from the federal cabinet.

According to insiders, draft agreements are ready, and the Central Power Purchasing Agency Guarantee Limited (CPPA-G) is expected to sign the term sheets within the week. The agreement includes Rs. 617 billion in fresh loans at KIBOR minus 0.2 percent, translating to an effective interest rate of 10.5–11 percent. These loans will be repaid over six years through the Debt Service Surcharge (DSS), which is currently levied at Rs. 3.23 per unit on electricity bills.

To ensure full repayment, the government is planning a legal amendment to remove the existing 10 percent revenue cap on the DSS. This legislative change will pave the way for the repayment of Rs. 683 billion in Power Holding Company Limited (PHL) loans and Rs. 569 billion in interest-bearing dues owed to power producers.

While banks initially pushed for guarantees from the State Bank of Pakistan, officials declined, warning instead of potential systemic risks if the power sector were to default. Officials have dismissed any suggestion of coercion, describing the negotiations as a necessary “reality check.”

Sources further revealed that term sheets were signed last week, with both cabinet and CPPA-G board approvals expected in the coming days. The government is aiming to disburse the loan before the end of the month, allowing the reduced circular debt figure to be reflected in the upcoming federal budg