Government negotiates Rs1,240 billion loan to tackle circular debt crisis

ISLAMABAD: Government officials are currently in discussions with banks to finalise a term sheet for borrowing Rs1,240 billion aimed at addressing the outstanding circular debt, which is currently estimated to be Rs2,381 billion.

According to top officials, the discount rate has significantly decreased from 22 percent to 12 percent. “In the near future, the discount rate may continue to decrease. The authorities are keen to capitalise on this trend and secure the Rs1.242 trillion loan,” the official stated. “Negotiations are ongoing with banks, and the goal is to finalise the term sheet before the arrival of the IMF mission,” they said, as reported by The News.

The governor of the State Bank of Pakistan (SBP) and the finance minister are participants in these discussions, as well. Government representatives are seeking to borrow the Rs1,240 billion at an interest rate of 6-7 percent over seven years, but banks are proposing to lend at the KIBOR+1 rate.

According to officials, once the term sheet is completed, the government plans to borrow from banks for a seven-year period, which will be repaid by electricity consumers through a current debt servicing surcharge of Rs3.23 per unit incorporated into the tariff.

Out of the Rs2,400 billion circular debt, approximately Rs720 billion has already been settled through the payment of past dues to six Independent Power Producers (IPPs) whose contracts have been terminated, as well as to 15 IPPs whose power purchase agreements have transitioned to a ‘take and pay’ model.

The authorities have resolved an amount of Rs450 billion with IPPs, of which Rs300 billion has been paid, and Rs150 billion is being waived in late payment surcharges (LPS). Additionally, Rs286 billion of WAPDA’s dues have been settled without any interest payments.

“If the circular debt is successfully addressed, it will provide relief to the power sector, which is opening up to the private power market, with Distribution Companies (DISCOs) being privatized,” said the official.

Power Ministry confirms circular debt management on track with IMF agreement

Recent data regarding circular debt within the power sector, as of November 2024, indicates a slight drop of Rs12 billion, bringing the total down to Rs2,381 billion during the period from July to November of FY25, compared to June 2024 when it stood at Rs2,393 billion.

However, inefficiencies within DISCOs and issues related to under-recovery contributed to losses amounting to Rs170 billion—comprising Rs94 billion due to inefficiencies and Rs76 billion attributed to under-recovery.

Current payable amounts to power producers are reported at Rs1,608 billion, while loan amounts held in the Power Holding Private Company (PHPL) are noted to be Rs683 billion. Additionally, GENCOs are reportedly liable for Rs90 billion in payments to fuel suppliers during the first five months of the fiscal year. The data also shows a budgeted but unreleased subsidy amount of Rs5 billion, with interest charges on loans from PHPL and payments to IPPs totalling Rs70 billion.

According to the November 2024 data posted on the official website of the Power Division, it has been emphasized that pending generation costs under the Quarterly Tariff Adjustments (QTA) and Fuel Charges Adjustments (FCA) amount to Rs31 billion. Furthermore, K-Electric owes Rs11 billion to the Central Power Purchasing Agency (CPPA).