KARACHI: The Economic Coordination Committee (ECC) on Friday approved the issuance of a government guarantee of over Rs659 billion ($2.3 billion) for circular debt financing of Rs1.225 trillion (4.3 billion), the finance ministry said.

The decision was made at an ECC meeting, presided over by Finance Minister Muhammad Aurangzeb, to review proposals submitted by various ministries and departments, including a Power Division summary seeking the guarantee.

Circular debt is an ever-growing chain of unpaid bills within Pakistan’s power and gas sector where one entity’s arrears cascade to the next. It has for years strained the economy through debt-servicing.

“The guarantee is intended for the settlement of Power Holding Limited’s debt and overdue payments to Independent Power Producers,” the finance ministry said in a statement.

“The ECC also authorized the Finance Division to issue a Letter of Comfort accordingly. Power Division was directed to report back to ECC on the timeframe for the closure of PHL following the settlement of debt issue.”

Pakistan, which relies heavily on domestic and external loans to repay its mounting obligations, has been taking measures to reduce this circular debt, a key condition of its $7 billion International Monetary Fund (IMF) program.

In June, Pakistan signed term sheets with 18 commercial banks for a 1.275 trillion Pakistani rupees ($4.50 billion) Islamic finance facility to help pay down mounting debt in its power sector, according to officials.

In its meeting on Friday, the ECC discussed and agreed on a framework regarding rationalization of tariffs and payment adjustments for nuclear power plants, government-owned power plants, and gas companies.

The committee also endorsed a phased, data-driven approach to ensure stability in remittance inflows, which rose by 11.9 percent month-on-month in October 2025 to $3.42 billion, and to avoid any abrupt disruption that could adversely impact the economy.