The federal government has secured deals with approximately 18 commercial banks for a loan package of Rs 1.275 trillion to address the mounting circular debt in the power sector. The draft agreements are now ready for final approval by the Federal Cabinet before Eid al-Adha, BR reported, citing sources. Â
Under the terms of the deal, commercial banks will provide Rs617 billion in fresh loans at an interest rate of 10.50–11%, pegged to the Karachi Interbank Offered Rate (KIBOR) minus 0.2%. The repayments will be made over six years, funded through the Debt Service Surcharge (DSS) currently levied at Rs3.23 per unit on electricity bills.
The loan is intended to alleviate part of the circular debt, which currently totals around Rs2.3 trillion. The government has committed to repay all outstanding loans of Rs683 billion held by Power Holding Company Limited (PHL) on behalf of power distribution companies (Discos) and settle Rs569 billion in arrears owed to power producers.Â
The government also plans to uncap the DSS, which currently represents 10% of the total revenue of power companies. This will require a legislative amendment, allowing for the payment of interest and partial repayments of loans that appear on Discos’ balance sheets.
In addition to the loan, the government has already secured approval from the International Monetary Fund (IMF) for its plan to reduce circular debt, which includes borrowing from commercial banks.
While earlier reports suggested that commercial banks had requested guarantees from the State Bank of Pakistan in case of government default, sources clarified that government negotiators merely urged banks to recognise the systemic risk of power sector collapse, rather than making any direct threats. A government official denied any coercion, emphasising that the situation was explained in a straightforward manner.
Disbursements from the banks are expected before the end of this month, ensuring that the reduced circular debt figures are reflected in the budget documents.
