Stock market surges on circular debt resolution hopes

• KSE-100 Index closes at 117,001.09, up 801.50 points.
• Intraday high reaches 117,202.09, a 1,002.5-point increase.
• Index touches low of 116,490.82 during trading session.

The stock market extended its bullish streak on Tuesday, closing higher as investor optimism remained strong following developments regarding circular debt resolution and continued progress in the International Monetary Fund (IMF) programme.

The Pakistan Stock Exchange's (PSX) benchmark KSE-100 Index gained 801.50 points, or 0.69%, to close at 117,001.09, up from the previous close of 116,199.59. 

The index touched an intraday high of 117,202.09, while the lowest level recorded during the session stood at 116,490.82. The energy sector, in particular, saw strong buying interest, as investors responded to potential improvements in cash flow and the broader implications of the government’s debt restructuring efforts.

“Optimism regarding resolution of circular debt, improvement in cash flow of energy chain and success of the IMF program,” said Samiullah Tariq, Head of Research at Pak-Kuwait Investment Company, highlighting the factors fueling the market rally.

In a significant development, the IMF has authorised Pakistan to borrow Rs1.25 trillion ($4.5 billion) from domestic banks to address its mounting circular debt without adding to its public debt stock, according to officials familiar with the matter.

This agreement was reached following policy discussions between Pakistani authorities and the IMF, during which Islamabad presented a six-year roadmap to manage the Rs2.4 trillion circular debt that has weighed down the power sector.

The IMF’s approval gives the government much-needed fiscal space, as the new borrowing will not be included in the country’s official debt statistics. To finance the repayment of these loans, Pakistan will continue levying a Rs3 per kilowatt-hour Debt Service Surcharge (DSS) on electricity bills, which is expected to generate over Rs300 billion annually.

Under the plan, the government intends to retire Rs1.5 trillion in circular debt through a combination of bank borrowings and revenue generated from the surcharge. Additionally, the authorities anticipate saving Rs463 billion following renegotiations with Independent Power Producers (IPPs) to lower capacity payments and adjust tariff structures.

The IMF’s willingness to accommodate this restructuring reflects its broader support for Pakistan’s energy sector reforms under the ongoing $7 billion Extended Fund Facility (EFF). Officials have stated that Pakistan has assured the Fund that improved collection mechanisms and operational efficiencies will prevent the re-emergence of circular debt in the future.

Power Minister Awais Ahmed Khan Leghari commented on the matter, stating that while the government has yet to receive a formal decision, he remains optimistic that the IMF has approved the borrowing plan. He further clarified that the DSS will remain unchanged and will continue to be part of any finalised term sheet with banks, with the surcharge staying below Rs3 per unit.

Meanwhile, the IMF has shared a draft of the Memorandum of Economic and Financial Policies (MEFP) with Pakistani authorities, marking another step toward finalising the ongoing loan review process. The Fund has also signaled its willingness to provide some relief for the construction and real estate sectors, although it remains uncertain whether such incentives will be implemented immediately or included in the next fiscal budget for 2025-26.

Pakistan and the IMF team concluded discussions last week without securing a staff-level agreement (SLA), which is a prerequisite for Islamabad’s formal request to receive the next $1 billion tranche under the EFF. The delay means further policy negotiations will take place in the coming days to reach consensus before the IMF’s Executive Board reviews Pakistan’s case.

The PSX began the week on a strong note, continuing the bullish momentum observed in previous sessions. On Monday, the benchmark KSE-100 index closed 663.42 points higher, or 0.57%, at 116,199.59 points, up from 115,536.17 points recorded in the prior session. 

The highest index level reached during Monday’s session was 116,626.83, while the lowest level was recorded at 115,883.22 points.