The federal government is in discussions with banks for a Rs. 1.24 trillion loan agreement aimed at reducing the Rs. 2.381 trillion circular debt in the power sector.

Taking advantage of the recent decline in the discount rate from 22 percent to 12 percent, authorities are seeking a loan at a 6-7 percent interest rate for seven years. However, banks have proposed a KIBOR+1 rate.

The borrowed funds will be repaid through the existing Rs. 3.23 per unit debt servicing surcharge on electricity tariffs.

The government has already settled Rs. 720 billion of the circular debt, including Rs. 450 billion paid to Independent Power Producers (IPPs) and Rs. 286 billion to WAPDA. It is believed that resolving the circular debt will facilitate the privatization of power distribution companies (DISCOs).

As of November 2024, circular debt had slightly declined to Rs. 2.381 trillion from Rs. 2.393 trillion in June. Payables to power producers stood at Rs. 1.608 trillion, with Rs. 683 billion parked in the Power Holding Private Company (PHPL). Pending subsidies amounted to Rs. 5 billion.

A total of Rs. 70 billion was spent on interest charges and payments to IPPs, while Rs. 31 billion remained pending under quarterly and fuel charge adjustments.