Pakistan's circular debt strategy unfolds through unprecedented banking alliance

In Pakistan's macroeconomic circus, the power sector has taken center stage. As the government works to stabilize the economy, resolving power sector issues has emerged as a critical priority.

This focus was evident during recent negotiations with the IMF for the First Review of the 37-month extended arrangement under the $7 billion Extended Fund Facility. A key highlight was the government's plan to address Pakistan's power sector circular debt crisis by injecting Rs1.5 trillion to clear outstanding liabilities.

Where will this money come from? Almost Rs 1.25 trillion of this injection will come from Pakistan’s commercial banks. The same banks that already have significant exposure to circular debt through previous lending to the energy sector. As part of a deal negotiated between the government and the banks, this financing will happen at below-KIBOR rates, potentially reducing the government's debt servicing costs by 3-5%. Despite a report in Dawn claiming that banks have been pressured into the deal, Profit has been reassured by high-ranking banking executives and government functionaries alike that this is not the case.