Government secures Rs1.25 trillion loan at sub-11pc to combat circular debt

ISLAMABAD: The government has successfully reached an agreement with commercial banks to borrow Rs1.25 trillion at an interest rate of less than 11 percent as part of its comprehensive strategy to address the circular debt threatening the viability of the power sector.

This new borrowing arrangement is expected to offer interest rates that are 3 percent to 5 percent lower than those applied to existing loans, as well as the penalties that the government incurs for delayed payments to energy suppliers, reported the Express Tribune.

This Rs1.25 trillion debt will be recorded on the books of the Central Power Purchasing Agency (CPPA) and will not contribute to the overall public debt. Currently, the government pays up to 14 percent interest on loans borrowed previously for managing circular debt and up to 16 percent for delayed payments to Independent Power Producers (IPPs).

The deal was finalised just after the government presented the outline of its plan to the International Monetary Fund (IMF), which is supporting these efforts.

While this agreement aims to eliminate the stock of circular debt, the ongoing flow of new circular debt is expected to persist for the next three to four years, a point that was communicated during discussions with the IMF.

The agreement has been hailed as a significant achievement for Prime Minister Shehbaz Sharif’s administration, supported by the military. It represents a commitment to reducing electricity costs and addressing inefficiencies in the power sector. A combined civil-military task force focused on structural reforms in the power sector played a key role in developing this plan, with its specifics finalized in the Ministry of Finance under the leadership of civil and military officials.

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

As part of this initiative, Mohammad Ali, the chairman of the Task Force, has been appointed as the Prime Minister’s adviser on privatisation, replacing Haroon Akhtar Khan, who will now serve as the Special Assistant to the Prime Minister on Industries and Production, succeeding current Industry Minister Rana Tanveer Hussain.

According to the terms of the new deal, commercial banks will collectively lend Rs1.25 trillion to the government at a rate 1 percent below the prevailing Karachi Interbank Offered Rate (KIBOR), resulting in an approximate interest rate of 10.8 percent. Although the government aimed for a fixed interest rate of 8 percent, the banks were unwilling to agree to these terms.

The total existing circular debt stock stands at Rs2.4 trillion, with Rs1.5 trillion of principal amounts needing to be addressed for its elimination. The government’s three-pronged strategy includes retiring this Rs1.5 trillion debt through a combination of new borrowing and available budget support. This will involve a reduction of Rs463 billion from the circular debt due to recent revisions in energy purchase agreements with IPPs, alongside Rs225 billion that does not require any settlement.

In total, the government intends to borrow Rs1.25 trillion from commercial banks while also utilizing Rs250 billion of budgetary space already available. Discussions are underway with independent power producers to waive interest payments totalling Rs272 billion in exchange for upfront payments.

From the Rs1.25 trillion borrowed, Rs683 billion will be allocated to settle debts of Power Holding Limited, which were previously secured at rates of KIBOR plus up to 2%. Additional allocations include Rs280 billion for nuclear power plants, Rs220 billion for LNG power plants, and Rs5 billion for government-owned plants. Plans are also in place to settle arrears for coal power plants.