Central Power Purchasing Agency nears to sign deal with 18 banks for Rs1.275trn loan to reduce circular debt

The Central Power Purchasing Agency-Guaranteed (CPPA-G) is on track to sign term sheets with 18 commercial banks for a Rs 1.275 trillion loan to tackle the mounting circular debt in Pakistan’s power sector, which currently stands at Rs 2.4 trillion. 

According to a report by Business Recorder, this agreement, expected to be finalised over the weekend, follows approval from the Task Force on Power, which has already held consultations with relevant stakeholders.

The Finance Ministry has been negotiating with the banks on the terms of the loan to avoid any future legal issues. The consortium providing the loan will include banks that have previously extended credit to the Pakistan Hydro Electric Limited (PHL) on behalf of Distribution Companies (Discos), as well as some larger banks that are joining the consortium.

The loan will involve fresh funding of Rs 617 billion, with a mark-up rate ranging between 10.50% and 11%, based on KIBOR-0.90 basis points. Repayments will be spread over six years, with electricity consumers expected to pay through a Debt Service Surcharge (DSS) of Rs 3.23 per unit.

According to the report, the power sector’s existing circular debt, amounting to Rs 2.4 trillion (roughly 2.1% of GDP), will be cleared by the end of the fiscal year 2025. The debt will be reduced through various measures, including renegotiating arrears with Independent Power Producers (IPPs) for Rs 348 billion, waiving Rs 387 billion in interest fees, and providing Rs 254 billion through additional subsidies already budgeted for clearing the debt.

However, Rs 224 billion in non-interest-bearing liabilities will not be cleared. The remaining Rs 1.252 trillion will be covered by the loan, which will be used to repay existing PHL loans and clear outstanding arrears owed to power producers.

Power Minister Sardar Awais Ahmad Khan Leghari stated that with the loan and accompanying measures, the circular debt would be reduced to Rs 350 billion. The Debt Service Surcharge will be set at 10% of the Nepra-determined revenue requirement, adjusted annually. If DSS revenues fall short of the required payment, the surcharge will be increased to cover the shortfall and ensure future payments are met.

The government plans to introduce legislation by the end of June 2025 to remove the 10% cap on DSS, ensuring a more flexible mechanism to meet payment obligations. 

Additionally, the government is working on a strategy to retire the interest-bearing circular debt stock by the end of FY25, which is expected to be no greater than Rs 337 billion.

These measures, alongside a reduction in interest charges on delayed payments to IPPs, are aimed at gradually reducing the circular debt to zero by FY31, as part of a broader effort to stabilize Pakistan’s energy sector.