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Business Recorder
3 days ago
- Business
- Business Recorder
Rs1.275trn loan deal finalised with banks
ISLAMABAD: The Federal Cabinet on Wednesday approved a long-anticipated agreement between the Government of Pakistan (GoP) and approximately 18 commercial banks for a landmark Rs 1.275 trillion loan, following intense negotiations over each clause. Sources in Power Division told Business Recorder, the loan aims to address a portion of the country's ballooning circular debt, currently estimated at around Rs 2.4 trillion. The International Monetary Fund (IMF) has already endorsed the government's circular debt reduction plan, which includes borrowing from commercial banks. Of the total circular debt, about Rs 700 billion is already carried on the books of the Power Holding Company Limited (PHL), on behalf of the power distribution companies (Discos). Rs1.275trn loan to tackle circular debt: CPPA-G likely to sign term sheets with 18 banks Under the agreement, commercial banks will provide fresh loans amounting to Rs 683 billion at an interest rate of 10.5%–11%, pegged to the Karachi Inter-bank Offered Rate (KIBOR) minus 0.90 basis points. Repayment will be made over six years via the Debt Service Surcharge (DSS), which is currently charged to electricity consumers at Rs 3.23 per unit. Notably, this mechanism ensures there will be no additional burden on the national treasury. According to the approved plan, the Rs 683 billion in financing will be used to clear PHL's outstanding liabilities. Repayment will occur in 24 semi-annual installments, with an annual ceiling of Rs 323 billion. In the event of rising interest rates, the total repayment cap has been set at Rs 1.938 trillion. Earlier reports suggested that banks had requested a guarantee from the State Bank of Pakistan in case the government defaulted. Sources familiar with the negotiations revealed that government representatives reminded the banks of the potential risks to their investments should the power sector collapse—an implicit warning aimed at expediting the deal. However, an official denied that any threats were made, stating that banks were simply asked to appreciate the seriousness of the situation. In response to concerns about delays in finalizing the term sheets, one key stakeholder dismissed such claims. 'There's no delay—we're just ironing out final details. This is a massive, unprecedented transaction in Pakistan, so it's natural that many elements require careful attention,' the official said. Official documents confirm that the government has committed to the IMF to borrow Rs 1.252 trillion from banks—Rs 683 billion to settle existing PHL loans, and Rs 569 billion to clear remaining interest-bearing arrears owed to power producers. Copyright Business Recorder, 2025
Business Recorder
11-06-2025
- Business
- Business Recorder
Energy budget: revenue first, reform later
The federal budget for FY26 offers few surprises on the energy front—yet between the lines lies a tale of strategic juggling, revenue prioritisation, and a dash of reform signalling. The biggest headline? Taxing solar. An 18 percent sales tax on imported solar panels is the most consequential step. Imports of solar panels crossed $2 billion last year, and this new measure is expected to generate a hefty Rs110–130 billion in additional revenue. That's a sizeable chunk, especially as the government eyes solar not just for green credentials but also as a tool to ease grid pressure and lower average tariffs in the long run. This is less about slowing the solar boom and more about monetising it smartly—provided it doesn't dampen momentum. Meanwhile, the budget also quietly confirms the removal of the ceilingon the Debt Service Surcharge (DSS), previously capped at 10 percent of the national average electricity tariff. With the government doubling down on additional bank borrowingto tackle the mounting circular debt stock, electricity consumers are now locked into paying the DSS for at least six more years—and not just at 10 percent, but potentially more, if required. It's a stealth tax that refuses to go away, now permanently baked into monthly bills. Some may still call it reform. But it is anything but. On the subsidy front, power sector allocations have been trimmed modestly, down from Rs1.19 trillion to Rs1.03 trillion. It's aligned with IMF conditionalities and hints at an upcoming base tariff hike in July, given the reduced inter-DISCO tariff differential. But there's a rub: the budget includes a Rs400 billion lump sum power subsidy, the same as last year. That raises questions about how the government intends to continue the Rs1.71/unit relief throughout FY26, which in FY25 was only covered for three months. Unless there's a mid-year revision, the math doesn't add up. One possible answer? The Petroleum Levy (PL). Budgeted at Rs1.47 trillion, it's up by Rs207 billion. Historically, the government has linked PL proceeds to funding power subsidies, and on paper, the math could work. But it's an optimistic call. The new Carbon Levy—Rs2.5/litre on petrol, diesel, and furnace oil—might fetch around Rs50 billion at best. That leaves the bulk of the PL target dependent on keeping petrol and HSD levies around Rs87–88/litre on average through the year. That's ambitious, if not outright risky, especially with oil markets as volatile as ever. A mid-year downward revision, like the Rs120 billion cut last year, is not off the table. Zooming out, the budget reveals the continued tilt toward consumption-based taxation, with energy at the centre. From taxing solar to squeezing PL harder, the budget leans more on revenue extraction than structural fixes. The former may be justifiable; the latter, if pushed too far, could backfire. Fiscal discipline is a fine goal. But as ever, execution, external prices, and policy coherence will decide whether these bets pay off—or unravel midway. Copyright Business Recorder, 2025
Business Recorder
26-05-2025
- Business
- Business Recorder
Reforms key to recovery
EDITORIAL: Anna Bjerd, World Bank Managing Director for Operations, after the conclusion of her two-day visit to Pakistan during which she also met Prime Minister Shehbaz Sharif commented that Pakistan's path to sustainable economic recovery and poverty alleviation rests on comprehensive reforms that prioritise human capital, macroeconomic stability, climate resilience, sustainable energy and private sector growth. While such exhortations have been repeatedly given by senior officials of multilaterals for more than two decades yet there is a growing perception in Pakistan that the programme designed by multilateral staff has several major flaws not only because they insist on standard normal conditions that are simply not applicable in Pakistan (particularly with reference to inflation control through a high discount rate) but also by Pakistani authorities agreeing to policies that have had severe implications on poverty levels which, as per a recent report of the World Bank, have reached a high of 42.4 percent (an example being taking administrative measures to pass on the costs of poor governance in the power sector and tax structure onto the general consumers). In this context, it is relevant to note that the World Bank in a recent report maintained that general sales tax has made the largest marginal contribution to the poverty increase as GST payments accounted for 7 percent of households' pre-tax expenditure, which lends to further impoverishment. During the week past the head of the department that designed and is implementing the 36-month-long ongoing Extended Fund Facility programme was also on a visit to Pakistan together with the mission leader and met with various members of the government, including the President who acknowledged that the IMF had helped the government stabilise the economy. There is no doubt that without an active Fund programme the threat of default was a distinct possibility not only because the Fund programme gave a comfort level to other multilateral donors but also because the three friendly countries (China, Saudi Arabia and United Arab Emirates) that have extended 16 billion-dollar rollovers this year indicated that they would withdraw the facility unless Pakistan is on a rigidly monitored Fund programme. While domestic economists have yet to express any satisfaction at the state of the economy (with rollovers admittedly 2 billion more dollars than the 14 billion dollars projected by the end of the current fiscal year), and net inflows are in the negative, yet there is no doubt that the looming threat of default has been averted. However, the first review report of the IMF warned that 'while the Debt Service Surcharge (DSS) are expected to fully cover payments the authorities must remove the existing DSS cap (end June 2025) to ensure that the DSS can be adjusted if needed to cover payments should there be any shortfall.' This is critical, given the limited fiscal space, which makes it necessary to ensure that the operations are entirety financed out of the existing DSS, the Fund argued. Finance Minister Muhammad Aurangzeb had previously stated that the budget would be finalised after the week-long discussions with the Fund scheduled to end on 23 May, which prompted Ahsan Iqbal, the Planning Minister, to state that the budget would be presented to parliament on 2 June. However, Iqbal has now stated that the budget would be presented on 10 June with speculation rife that the authorities and the Fund staff have yet to agree on certain government proposals and finalise the budget. There is little doubt that subsequent to India's failed adventurism defence outlay would have to rise; however, there is intense debate amongst domestic economists that the lack of a consensus with the IMF relates to the government's intent to lower the tax on the salaried, which has contributed to pushing more below the poverty line, reducing the electricity rates based on projection of reduced costs, higher external borrowings projected for this year (that may be a challenge as budgeted external borrowings this year did not materialise), greater reliance on sales tax with implications on poverty, an easy to collect tax, and low growth with rising unemployment due to input costs in this country being much higher than the regional average. We not only hope but expect that structural reforms will begin to be implemented in earnest rather than passing on the buck to the hapless consumers as in previous programmes that accounts for strengthening of the elite capture with respect to budgeted revenue generation as well as expenditure allocations. Copyright Business Recorder, 2025
