Govt, banks move closer to deal on Rs1.23 trillion power sector debt resolution: report

The government and commercial banks are progressing toward a potential agreement to restructure Rs1.23 trillion in loans to address Pakistan’s mounting power sector circular debt, Business Recorder reported citing sources. 

Under the proposed plan, Rs700 billion in existing loans will be restructured at a lower interest rate, while Rs523 billion will be fresh borrowing.

According to the report, a delegation from the Power Division recently met with commercial banks in Karachi, warning them of the sector’s financial instability and the broader risks to the banking industry if a resolution is not reached. Following these discussions, bank representatives engaged with the Finance Ministry to explore possible terms for the loan restructuring.

A senior official indicated that 15-20 commercial banks are expected to be part of the lending consortium. The loan is planned to be retired within two to three years. 

While the government aims to secure the full Rs1.23 trillion at a fixed 6% interest rate until maturity, banks have expressed reluctance to lend at this rate. Instead, discussions suggest that the final interest rate may be set at 7% or 7.5%, though no firm agreement has been reached as banks have yet to present their term sheets.

Federal Minister for Power stated that the repayment of this loan will be covered through a Rs2.83 per unit Debt Servicing Surcharge (DSS) on electricity bills. He assured that no additional surcharges or taxes would be imposed on consumers for this purpose.

The proposal has been informally shared with the International Monetary Fund (IMF), but a formal submission will only be made once banks finalise their term sheets. Officials believe that the IMF is unlikely to object to the plan, as it involves replacing expensive loans with relatively cheaper financing.

The government’s Task Force on Circular Debt has outlined a broader debt reduction strategy, already achieving savings of Rs300 billion by waiving Late Payment Interest (LPI). A similar amount is expected to be saved through ongoing negotiations with government-owned power producers.

Pakistan’s total circular debt across the power and petroleum sectors has reached Rs5 trillion, with the petroleum sector alone accounting for Rs2.7 trillion. Prime Minister Shehbaz Sharif recently directed the Task Force, in coordination with the Petroleum Division, to develop a detailed plan for reducing petroleum sector circular debt, which will be presented to him soon.