The Asian Development Bank (ADB) has agreed to support Pakistan’s energy sector by providing a loan of $300m. The policy-based loan aims to help Pakistan handle the sector’s energy infrastructure policy constraints, financial sustainability and governance.

ADB Central and West Asia director general Werner Liepach said: “The cash shortfall across the power supply chain in Pakistan, also known as circular debt, has shot up to more than $10bn and is a longstanding chronic issue ailing the country’s power sector.

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“A comprehensive and realistic Circular Debt Reduction Plan, assisted by ADB in close coordination with other development partners, is the cornerstone of this subprogramme. The plan aims to drastically cut the new flows of circular debt and provides policy directions on addressing accumulated circular debt.”

The financing will support the first of three subprograms totalling $1bn under the Energy Sector Reforms and Financial Sustainability Programme.

ADB noted that its development partner the Export-Import Bank of Korea has agreed to provide $80m in co-financing for the first sub-programme. Pakistan has been making significant efforts to enhance its electricity generation capacity and stabilise its power supply.

However, the country still has to deal with certain inefficiencies, which are expected to have cost Pakistan’s economy up to $18bn in 2015.

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The energy reform programme has been designed to help the country address the fundamental causes of circular debt. It will focus on strengthening energy accounting, minimising power generation costs as well as making inadequate tariff and subsidy systems better.