The government is set to hold a signing ceremony today for a financing facility agreement to reduce the circular debt in the power sector, according to the Prime Minister’s Office (PMO).

A letter from the Central Power Purchasing Agency to all banks and power sector entities invited their chief executive officers and heads to attend the event.

It said the event will be held at the PMO and PM Shehbaz Sharif will also virtually address the event as he is currently in New York for the UN General Assembly session.

Pakistan’s debt burden has become the defining constraint of its fiscal and economic future. According to data released by the State Bank of Pakistan, the total government debt (excluding the International Monetary Fund) increased from Rs69 trillion in June 2024 to Rs78tr by June 2025.

The public debt (including the IMF debt) increased to Rs80.5tr from Rs71.2tr in June 2024. Both the numbers understate the full level of the government’s indebtedness.

Developments suggest that the government is negotiating with banks to borrow Rs1.2tr to settle the power sector’s circular debt.

It was planned to borrow Rs1.275tr from banks as the government is willing to settle a portion of the circular debt, which has surged to Rs2.3tr.

What is strange is that this loan will be repaid over six years through a Debt Service Surcharge (DSS) included in the electricity bills.

Initially, the banks were hesitant to meet the government’s request to lend money at a lower rate than the policy rate, but eventually, 18 commercial banks agreed to do so. The loan will be repaid over a six-year period.

“The government has been borrowing less than the maturity amount of treasury bills during FY25, which has substantially increased the outstanding amount. This new borrowing could address this accumulation,” said a banker.