IMF allows Pakistan to borrow PKR 1.25 trillion from banks to tackle circular debt

The International Monetary Fund (IMF) has given Pakistan the nod to borrow PKR 1.25 trillion from commercial banks to eliminate the mounting circular debt in the power sector, sources confirmed to Nukta on Monday.

The agreement was reached during ongoing discussions between the IMF and Pakistani authorities, where Islamabad presented its strategy to address the chronic issue of circular debt — currently standing at approximately PKR 2.4 trillion — over the next six years.

Significantly, the IMF has agreed that this fresh borrowing will not be categorized under Pakistan's overall public debt, giving much-needed fiscal breathing space to the cash-strapped government.

Additionally, the lender endorsed Pakistan's plan to continue collecting approximately PKR 3 per unit debt servicing surcharge on electricity bills to help service this borrowing. The surcharge, already in effect, is expected to yield over PKR 300 billion annually, according to government estimates.

Debt reduction strategy

Officials briefed the IMF that out of the total PKR 2.4 trillion circular debt, the government plans to settle PKR 1.5 trillion in principal payments through a combination of fresh borrowing and debt servicing surcharge collections. Another PKR 463 billion is projected to be reduced following the recent renegotiation of power purchase agreements with Independent Power Producers (IPPs), which is aimed at lowering capacity payments and revising tariffs.

To finance the settlement, Pakistan will raise PKR 1.25 trillion from commercial banks over a phased period. The government assured the IMF that the combination of the debt servicing surcharge and improved efficiency measures in the energy sector will prevent the re-emergence of circular debt.

Circular debt in Pakistan’s energy sector has long plagued the economy, driven by inefficiencies, power theft, delayed subsidy payments, and a tariff gap between the cost of electricity generation and consumer prices. The rising debt has not only strained public finances but also discouraged investment in the country’s power infrastructure.

The IMF's flexibility in allowing the off-balance-sheet treatment of the new borrowing reflects the lender’s support for structural reforms in Pakistan’s energy sector under the ongoing Extended Fund Facility (EFF).