Banks seal record Rs1.2tr deal to tackle circular debt

September 24, 2025 (MLN): The banking industry, under the auspices of the Pakistan Banks Association (PBA), has facilitated a record Rs1.225 trillion restructuring and financing transaction agreement to ease Pakistan’s crippling circular debt burden. 

The signing ceremony, held at the Prime Minister’s House in Islamabad, marked a breakthrough in addressing Pakistan’s longstanding circular debt crisis.

This is a challenge that has strained Pakistan’s energy supply chain, weakened investor confidence, and grown to nearly Rs2.4tr, almost 2.1% of the country’s GDP.

With the active participation of 18 leading banks, the PBA played a catalytic role, working in close coordination with the Ministry of Finance, the Ministry of Energy (Power Division), the State Bank of Pakistan (SBP), and the Central Power Purchasing Agency (CPPA).

PBA helped build consensus on intricate regulatory and financial issues, paving the way for one of the most significant financial restructurings in Pakistan’s history. 

The collective arrangement comprises Rs659.6 billion in restructuring of loans already on the banks’ balance sheets and Rs565.4bn in fresh financing to clear overdue government payments to power producers.

Moreover, the release of sovereign guarantees worth Rs. 660 billion will unlock fresh liquidity, allowing the banking sector to inject fresh financing into key sectors, including agriculture, SMEs, affordable housing, education, and healthcare.

This innovative, cashflow-backed structure introduces no new burden on the government or additional surcharge on consumers.

Instead, the existing Rs3.23 per unit debt service surcharge will be redirected toward debt repayment, ensuring a sustainable and transparent framework.

The facility has been structured on highly concessional terms, with a floating rate set at KIBOR minus 90 basis points, about 150 basis points lower than the existing loan rate.

This reflects the banking industry’s willingness to absorb a reduction in earnings to make the transaction viable and beneficial for the country.

Highlighting the national impact of this agreement, Zafar Masud, Chairman PBA, stated, “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, he added.

He further stated, "It also shows what can be achieved when the public and private sectors work together with shared vision and purpose.”

This historic agreement serves as a template for solving other structural challenges through innovation and collaboration.

By joining hands with the Government of Pakistan, the banking sector has reaffirmed its role as a trusted partner in delivering sustainable solutions and setting new standards for prudent fiscal management and public-private cooperation.

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