Govt cuts deal to settle Rs1.25tr circular debt

Express Tribune

07-03-2025

The government has reached a deal with commercial banks to borrow Rs1.25 trillion at less than 11% interest rate as part of its three-pronged strategy to eliminate the threat of circular debt to the power sector viability soon.
The fresh deal is at least 3% to 5% cheaper than the interest on the existing facilities and the penalties that the government pays for not making timely payments of the energy purchases. The Rs1.25 trillion debt is taken on the books of the Central Power Purchasing Agency (CPPA) and it would not be part of the overall public debt.
The government is currently paying up to 14% cost to the commercial banks on the loans that it had taken in the past to retire the circular debt and up to 16% price to the Independent Power Producers (IPPs) for not making timely payments to them.
The understanding has been reached a day after the contours of the plan were shared with the International Monetary Fund for its endorsement, the government sources told The Express Tribune.
With the implementation of the plan, the circular debt stock will be eliminated but the flow of circular debt would continue for at least three to four years, the global lender was informed during the ongoing talks.
The deal has been considered as a major success of the government of Prime Minister Shehbaz Sharif, which with the help of the military, has undertaken numerous steps to reduce the cost of electricity and minimise inefficiencies.
The deal has been worked out by a combined civil-military task force for the Structural Reforms in Power Sector and its modalities were finalised in the Ministry of Finance on Thursday in the presence of the civil-military leadership.
Prime Minister Shehbaz Sharif has already made the chairman of the Task Force, Mohammad Ali, as his adviser on privatisation. A formal notification is expected soon. Haroon Akhtar Khan has been made Special Assistant to Prime Minister on Industries and Production, replacing incumbent Industry Minister Rana Tanveer Hussain.
According to the deal, the commercial banks would cumulatively lend Rs1.25 trillion to the government at a rate of 1% less than the prevailing Karachi Interbank Offered Rate (KIBOR). This translates into about a 10.8% rate.
The government tried to get the loan at 8% fixed interest rate but the banks did not agree to it.
Out of the total Rs2.4 trillion existing circular debt stock, there is a need to resettle the Rs1.5 trillion principal amounts to eliminate the debt stock, the officials who negotiated the deal told The Express Tribune.
As part of the three-pronged strategy, the government would retire Rs1.5 trillion through fresh borrowing and already available budget support. An amount of Rs463 billion would be reduced from the circular debt due to recent revised energy purchase agreements with the IPPs and Rs225 billion would not require any settlement.
The details showed that the government will borrow Rs1.25 trillion from the commercial banks, and Rs250 billion space is already available in the budget.
The sources said that the government will negotiate with the independent power producers to waive the interest payments amounting to Rs272 billion in return for taking upfront full payments.
Out of the Rs1.25 trillion, the Rs683 billion will be settled against the Power Holding Limited debt. This debt had been obtained in the past at a rate of KIBOR plus up to 2%.
The nuclear plant powers will get Rs280 billion, the LNG power plants will get Rs220 billion and the government owned power plants will receive Rs5 billion. The coal power plants dues will also be settled.
How the debt will be serviced
The government will repay the Rs1.25 trillion debt over a period of six years and it will be serviced through the Rs2.83 per unit average debt servicing surcharge that the consumers already pay. An estimated Rs350 billion is being generated every year.
During the first year of the deal, the government will pay about Rs135 billion in interest cost on this debt and the remaining savings of about Rs215 billion will be used to pay off the principal loans being taken from these banks.
However, one backdrop of the deal is that the interest rate will rise with the increase in the policy rate by the central bank, which would reduce the space for making principal repayments.
The finance ministry had earlier struck a deal with the commercial banks to settle PIA's Rs268 billion worth debt at 12% fixed rate, or in case the KIBOR drops below this rate the interest rate will automatically reduce. At that time, the interest rates were 22%.
The government has already given Rs683 billion irrevocable guarantee against the Power Holding Limited loan. This Rs683 billion debt would also be restructured at 1% minus KIBOR and the guarantees will be used again against the fresh lending.
The Rs200 billion unencumbered land owned by eight power distribution companies will be used as collateral to back the Rs200 billion debt.
The government expects that another Rs463 billion circular debt will be reduced through the ongoing renegotiations of the IPPs deals, excluding Chinese power plants. A sum of Rs224 billion that is part of the existing debt stock related to fuel suppliers or owed to the government hydel plants will not require any settlement.
Flow still remains a problem
During the ongoing talks with the IMF, the flow of the circular debt remained a concern, although the government had managed to restrict the flow to Rs11 billion in the first half of this fiscal year.
The IMF was told that it will take three to four years to stem the annual increase in the circular debt due to inefficiency, theft and losses.
Overall, circular debt had been restricted to Rs2.384 trillion during the first half of this fiscal year, which again jumped close to Rs2.48 trillion by end of last month. The IMF was told that there was an increase of Rs50 billion in the flow of the circular debt in January and another almost equal amount was added in February.
February's figures were provisional and might be slightly adjusted.
The IMF inquired about the reasons behind the major expected increase in the circular debt in the second half when during the first half there was no increase.
An official of the Energy Ministry said that it will take three to four years to completely stem the flow of circular debt. He said that it is expected that three power distribution companies –Gujranwala, Islamabad and Faisalabad –will achieve recovery targets set by Nepra in the current fiscal year.
The official further said that in the next phase Multan and Lahore power distribution companies would achieve NEPRA's recovery targets but it will take three to four years when Hyderabad, Sukkur and Quetta power distribution companies' recoveries of the bills would improve, he added.
The IMF was informed that the DISCO Support Unit was made functional in Hyderabad, Lahore and Sukkur power distribution companies, which would help reduce the flow of the circular debt.
During the first half of the fiscal year, the power sector suffered Rs158 billion in losses due to inefficiency, theft, and under-recoveries of bills. Little more than half of the Rs158 billion losses were caused by just two power distribution companies Hyderabad Electricity Supply Company (HESCO) and Sukkur Electric Power Company (SEPCO).
The government of Prime Minister Shehbaz Sharif had not reshuffled the boards of HESCO and SEPCO due to an arrangement with the Pakistan Peoples Party (PPP)-the government's ally in the National Assembly that rules Sindh province.
The sources said that the IMF did not accept the government's proposal to extend the winter relief package for the industrial and the agriculture sectors for the full fiscal year. The IMF inquired about the impact of the winter package on the power generation.
During the month of December, the industrial electricity consumption increased 6.9% and in January the increase was 2.7%, Sardar Awais Laghari, the Federal Minister for Power told the special cabinet meeting on Tuesday.
The IMF also did not accept the government's proposal to waive off the GST on the electricity bills to reduce the cost for the end consumers.