Pakistan Railways will receive a $500m loan from the Asian Development Bank (ADB) under a multi-tranche financing facility to revive the network.
A first payment of $120m will be provided in 2011 and the remainder will be released in two instalments until 2013.
The project will connect railway lines in Gujranwala, Shahdara and Lala Musa to the industrial cities of Faisalabad and Rawalpindi.
Other works involve extending a 70km line and introducing a computerised inter-locking signalling system on 134km of track.
The final project will see the construction of a rail link between Shahdara and Faisalabad, improved communications, and the installation of a computerised system along the route.
The project is estimated to cost $190m and is scheduled to start operations in 2013, according to tribune.com.pk.
The ADB has also approved a separate $1.5m loan for technical aid to Pakistan.
The project will receive final approval once Pakistan Railways submits a feasibility report to the bank by the end of the year.