Japan will provide Pakistan with a PKR128.6bn ($1.53bn) loan to revive the Karachi Circular Railway (KCR).
The KCR was closed down in 1999 because of a decline in infrastructure and rolling stock investments, which led to a reduction in passengers.
Once open, the 121km railway is expected to handle 290 trains a day, carrying 690,000 passengers, according to nation.com.
The network will be upgraded to include computerised ticketing, automated ticket gates, elevators at stations and electrification of lines.
The loan agreement is expected to be finalised in mid-2010.
The project is scheduled to be completed in two phases and is expected to resume operations in 2014.