Pakistan has committed to clearing its Rs. 2.4 trillion circular debt stock—equivalent to 2.1% of GDP—by the end of fiscal year 2025, according to the IMF’s first review report.
As part of the plan, the government will resolve Rs. 348 billion through renegotiated settlements with Independent Power Producers (IPPs), which includes Rs. 127 billion from already allocated subsidies and Rs. 221 billion via the Central Power Purchasing Agency’s (CPPA) cash flow. Additionally, Rs. 387 billion will be addressed through waived interest payments, while another Rs. 254 billion will be covered through extra budgeted subsidies.
Liabilities amounting to Rs. 224 billion that don’t carry interest will remain unsettled for now. The remaining Rs. 1,252 billion will be financed through commercial bank loans. This includes Rs. 683 billion to repay Power Holding Limited loans and Rs. 569 billion to settle remaining interest-bearing dues to power producers.
The new loans will carry lower interest rates compared to the existing circular debt, with annual repayments to be collected through a debt service surcharge over six years. The surcharge will be set at 10% of NEPRA’s annual revenue requirement and adjusted each year during tariff rebasing. If revenue collection falls short, the surcharge will be raised accordingly.
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Importantly, no government subsidies will be used to cover revenue gaps. A retirement plan for the projected Rs. 337 billion in interest-bearing circular debt remaining by FY2025-end will be developed as part of the FY2026 budget process, again without using subsidies.
Circular debt targets have been revised downward, and the stock is expected to gradually decline to zero by FY2031. As of the end of January 2025, the total circular debt stood at Rs. 2,444 billion.
