Power sector: federal cabinet approves Rs1.275trn bank loan to cut circular debt
Pakistan federal cabinet approved on Wednesday Rs1.275 trillion loan from commercial banks at 'the lowest-ever rate' to cut its power sector's circular debt.
The decision was taken for a permanent resolution of the circular debt in the power sector, the Ministry of Energy (Power Division) said.
The loan aims to offset a portion of the circular debt, which currently stands at approximately Rs2.4 trillion.
'Under the plan, Rs1.275 trillion will be acquired from banks at a historic low interest rate — 0.9% lower than the 3-month KIBOR [Karachi Interbank Offered Rate],' it said.
'For the first time, instead of maintaining the circular debt stock at a certain level through previous methods, it will be gradually eliminated with the help of banks.'
Circular debt: Govt in talks with banks to raise Rs1.275trn
The loan of Rs1.275 trillion would be used to clear dues of independent power producers (IPPs) and retire Power Holding Company Limited (PHL) debt, the Power Division said.
'The acquired loan will also be fully retired over the next six years. This move will not impose any additional financial burden on the national exchequer.'
According to the cabinet-approved plan, Rs683 billion of the financing will be used to clear the outstanding dues of the Power Holding Company Limited (PHL) .
The loan will be repaid in 24 semi-annual installments, and the interest rate will be 0.9% lower than the 3-month KIBOR.
An annual repayment cap of Rs323 billion was set, while a maximum repayment limit of Rs1.938 trillion was set in case of increased interest rates in the future.
Business Recorder reported earlier this month that the government had finalised agreements for a historic loan package of Rs1.275 trillion with approximately 18 commercial banks to address the growing circular debt in the power sector.
How will govt clear Rs2.4trn circular debt?
Pakistan government has committed to the International Monetary Fund (IMF) to clear the circular debt by end of fiscal year 2025, according to the IMF report 'First Review Under the Extended Arrangement Under the Extended Fund Facility, Requests for Modification of Performance Criteria and Request for an Arrangement Under the Resilience and Sustainable Facility' released last month.
K-Electric write-offs: NEPRA allows Rs50 billion as 'full and final claim'
According to the IMF report, Pakistan government has said that it's on track to achieve net zero circular debt flow for FY25 and will strive for the same in FY26, through 'a combination of timely tariff increases, targeted subsidies, and cost-reducing reforms'.
As per the government commitment, the National Electric Power Regulatory Authority (NEPRA) will continue with timely automatic notifications of regular quarterly tariff adjustments (QTAs) and monthly fuel cost adjustments (FCAs) to capture any gaps between the base tariff and actual revenue requirements that arise during the year, to prevent circular debt flow.
'We [Pakistan government] will ensure the full implementation of the July 2025 annual rebasing (new SB, July 1, 2025), QTRs, and FCAs going forward. All provinces agree not to introduce any subsidy for electricity or gas.'
Of the existing circular debt stock of Rs2.4 trillion (2.1 percent of GDP), the government committed to clear, by end-FY25, Rs348 billion via renegotiation of arrears with IPPs (Rs127 billion of which will be via already-budgeted subsidy for circular debt stock clearance and Rs221 billion of which will be via CPPA cash flow); Rs387 billion via waived interest fees; and Rs254 billion via additional already-budgeted subsidy for circular debt stock clearance; Rs224 billion in non-interest-bearing liabilities will not be cleared.
The remaining Rs1.252 trillion (now Rs1.275 trillion) was committed to be borrowed from banks to repay all PHL loans (PRs 683 billion) and to clear the remaining stock of interest-bearing arrears to power producers (PRs 569 billion), according to the IMF report.
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Business Recorder
15 hours ago
- Business Recorder
World Bank seeks more transparency in debt practices
WASHINGTON: The World Bank said Thursday it is worried that some countries are less and less transparent about their public debt and use complex borrowing tools, making it harder to measure how much they owe. To remedy this the bank called for a fundamental change in the way debtor and creditor countries report and disclose debt. The worries concern in particular low-income countries that make increasing use of borrowing arrangements the bank considers opaque. These include private placements — a kind of funding round done not publicly but privately, central bank swaps, and collateralized transactions, the bank said in a report on debt transparency. The proportion of low-income countries publishing some debt data has grown from below 60 percent to more than 75 percent since 2020. But only 25 percent disclose loan-level information on new debt, the report states. And countries are now turning to local investors as they take on debt but not publishing numbers on these loans. 'Recent cases of unreported debt have highlighted the vicious cycle that a lack of transparency can set off,' said the World Bank's Senior Managing Director, Axel van Trotsenburg. In Senegal, for instance, an independent administrative court that serves as an auditor said in February the government debt in that African nation had risen to 99.67 percent of GDP — a rate one-quarter higher than what had been announced by the previous government. An IMF team that visited Senegal in March said officials had made false statements regarding budget deficits and public debt for the period 2019-2023.
Express Tribune
17 hours ago
- Express Tribune
Rs1.275tr loans signed to ease circular debt
Pakistan has signed term sheets with 18 commercial banks for a Rs1.275 trillion ($4.50 billion) Islamic finance facility to help pay down mounting debt in its power sector, government officials said on Friday. The government, which owns or controls much of the power infrastructure, is grappling with ballooning "circular debt", unpaid bills and subsidies, that has choked the sector and weighed on the economy. The liquidity crunch has disrupted supply, discouraged investment and added to fiscal pressure, making it a key focus under Pakistan's $7 billion IMF programme. Finding funds to plug the gap has been a persistent challenge, with limited fiscal space and high-cost legacy debt making resolution efforts more difficult. "Eighteen commercial banks will provide the loans through Islamic financing," Khurram Schehzad, adviser to the finance minister, told Reuters. The facility, structured under Islamic principles, is secured at a concessional rate of 3-month KIBOR, the benchmark rate banks use to price loans, minus 0.9%, a formula agreed on by the IMF. "It will be repaid in 24 quarterly instalments over six years," and will not add to public debt, Power Minister Awais Leghari said. Existing liabilities carry higher costs, including late payment surcharges on Independent Power Producers of up to KIBOR plus 4.5%, and older loans ranging slightly above benchmark rates. Meezan Bank, HBL, National Bank of Pakistan and UBL were among the banks participating in the deal. The government expects to allocate Rs323 billion annually to repay the loan, capped at 1.938 trillion rupees over six years. The agreement also aligns with Pakistan's target of eliminating interest-based banking by 2028, with Islamic finance now comprising about a quarter of total banking assets.
Express Tribune
19 hours ago
- Express Tribune
Uphill task
Listen to article The government is continuing in its latest effort to privatise PIA, months after the previous failed attempt led to an embarrassing situation where a bidder with questionable credentials offered a laughably low bid that did not even meet the minimum bid. Two earlier privatisation attempts have also collapsed in the past two years. But despite the noticeably low interest in the market, privatisation is a critical condition of the IMF's recent bailout, which has made the government a motivated seller. While PIA and the government may claim the airline has gotten its act back in order after it posted a small operating profit in 2024, after 21 consecutive loss-making years, the truth is far more nuanced, as state-administered life support made it possible. About 80% of its debt was offloaded onto public coffers, and several tax exemptions have buoyed its balance sheet and made the airline more attractive to suitors. Unfortunately, the opacity of the bidding process has been a challenge for some otherwise competent potential bidders who are rich in expertise but may lack deep pockets. And despite the government's attempt to make qualification criteria stricter, most of the parties vying for the airline are not active in aviation-related industries. The government should also look into some creative solutions that allow it to receive fair payment — perhaps in guaranteed installments with some deferral period — instead of setting unattainable deadlines for what could be one of the biggest corporate deals in Pakistan's history. It is also worth reanalysing why there has been so little international interest in the airline. Market experts have noted the government's desire for PIA to remain Pakistani creates a conflict between pride and practicality. But the domestic airline industry is competitive enough to pick up the slack even if a prospective buyer wants to streamline PIA's operations. The focus should be on getting taxpayers some value for the billions they have poured down the drain.
