In a decisive move to stabilise Pakistan’s struggling energy sector, the government is all set to reduce the power sector circular debt from an alarming Rs2.381 trillion to Rs561 billion.

This significant reduction will be achieved by disbursing Rs1,275 billion obtained through commercial bank financing—marking one of the largest financial restructuring efforts in the country’s power sector history.

According to a senior official from the Power Division, the massive payment is expected to be rolled out within this or the next week as part of the government’s commitment to the International Monetary Fund (IMF). The plan aims to bring the power sector's circular debt down to manageable levels while avoiding any new financial burden on electricity consumers.

The borrowed amount of Rs1,275 billion will be channelled through the Central Power Purchase Agency-G (CPPA-G), which will utilise the funds to repay Rs683 billion in Power Holding Limited (PHL) loans and clear Rs569 billion in outstanding payments to power producers. This restructuring will cut down the interest-bearing and non-interest-bearing liabilities and reduce the overall debt to Rs561 billion.

Much of the credit goes to the government’s Task Force on Power Sector, which includes Prime Minister’s Adviser Muhammad Ali, Lt Gen Zafar Iqbal, and experts from SECP, NEPRA, and CPPA-G. Their negotiations with Independent Power Producers (IPPs) resulted in the waiver of Rs387 billion in late payment interest charges—a major win for the state’s financial recovery.

So far, Rs348 billion in arrears have been cleared—Rs127 billion through budget subsidies and Rs221 billion paid directly by CPPA. An additional Rs254 billion has been managed through extra budgeted support for circular debt clearance.

Even though Rs561 billion in liabilities remains, the government plans to tackle it through reforms and increased efficiency in power distribution companies (Discos). To finance the repayment of the Rs1,275 billion loan, a Debt Service Surcharge of Rs3.23 per unit—already part of electricity bills—will continue for the next six years. Officials clarified that this surcharge is not new, but its duration has now been extended under the government’s financial obligations to the IMF.

In a significant policy shift, the previously imposed 10% cap on the surcharge has been lifted to comply with IMF’s structural benchmarks.