Govt secures Rs1.25tr loan at lower interest to cut power sector circular debt

The government has secured a deal with commercial banks to borrow Rs1.25 trillion at an interest rate below 11% to tackle the mounting circular debt in the power sector, The Express Tribune reported.  

The agreement, reached following discussions with the International Monetary Fund (IMF), is part of a broader three-pronged strategy to stabilise the energy sector. 

Under the plan, Rs1.5 trillion of circular debt will be retired through fresh borrowing and budgetary support, while Rs463 billion will be reduced through revised energy purchase agreements with IPPs. An additional Rs225 billion will be adjusted without requiring direct settlements.

The loan restructuring includes Rs683 billion designated for settling Power Holding Limited debt, originally borrowed at higher rates of KIBOR plus up to 2%. Other allocations include Rs280 billion for nuclear power plants, Rs220 billion for LNG-based power plants, Rs5 billion for government-owned power plants, and additional funds for coal-based plants.

The financing, secured at rates 3% to 5% lower than previous loans, aims to retire older, more expensive debt while reducing penalties paid to independent power producers (IPPs) for delayed payments. This debt will be placed on the books of the Central Power Purchasing Agency (CPPA) and will not be counted toward the overall public debt.

To service the Rs1.25 trillion debt, the government will rely on the existing Rs2.83 per unit surcharge in electricity bills, generating approximately Rs350 billion annually. In the first year, Rs135 billion will be allocated for interest payments, while Rs215 billion will go toward repaying the principal loan. 

However, the agreement carries the risk of rising costs if the central bank increases interest rates, which would impact the ability to make principal repayments.

While the restructuring is expected to provide immediate relief, the government acknowledges that the flow of circular debt remains a concern. The total circular debt stock had reached Rs2.48 trillion by February, despite efforts to restrict its increase to Rs11 billion in the first half of the fiscal year. 

Government officials informed the visiting IMF mission that it will take three to four years to fully resolve the issue due to ongoing inefficiencies, electricity theft, and revenue shortfalls.

The government also expects that another Rs463 billion will be saved through renegotiated IPP deals, excluding Chinese power plants. Additionally, Rs224 billion in outstanding debt related to fuel suppliers and hydropower plants will not require any settlement.

During the ongoing talks with the IMF, officials also discussed measures to enhance revenue collection from power distribution companies. While Gujranwala, Islamabad, and Faisalabad Electric Supply Companies are expected to meet recovery targets set by the National Electric Power Regulatory Authority (NEPRA) this fiscal year, it may take another two to three years for companies in Multan and Lahore to achieve the same efficiency. Recovery improvements in Hyderabad, Sukkur, and Quetta are expected to take even longer.