The government is negotiating with banks to finalise terms for borrowing Rs1.24 trillion to address circular debt in the power sector, which currently stands at Rs2.38 trillion, according to a news report.
With the discount rate dropping from 22% to 12%, officials aim to capitalise on lower borrowing costs before the arrival of the International Monetary Fund (IMF) mission.
The State Bank of Pakistan governor and the finance minister are involved in discussions, with authorities seeking a seven-year loan at an interest rate of 6-7%. However, banks prefer to lend at KIBOR+1. Once finalised, the loan will be repaid through the existing debt servicing surcharge of Rs3.23 per unit in electricity tariffs.
Of the Rs2.4 trillion circular debt, Rs720 billion has already been settled by clearing past dues of independent power producers (IPPs) whose contracts ended or were switched to a “take and pay” model. Authorities have resolved Rs450 billion in IPP payments, with Rs300 billion paid and Rs150 billion in late payment surcharges waived. Additionally, Rs286 billion owed to WAPDA has been settled without interest charges.
Officials believe addressing circular debt will help stabilize the power sector, which is set for private market participation and the privatization of power distribution companies (DISCOs). Data from the Power Division indicates that circular debt declined by Rs12 billion to Rs2.38 trillion between July and November FY25. However, DISCOs’ inefficiencies and under-recoveries contributed Rs170 billion in losses—Rs94 billion due to operational inefficiencies and Rs76 billion from revenue shortfalls.
Payables to power producers stood at Rs1.61 trillion, while loans parked in the Power Holding Private Company (PHPL) amounted to Rs683 billion. GENCOs’ outstanding dues to fuel suppliers reached Rs90 billion in the first five months of the fiscal year. Meanwhile, budgeted but unreleased subsidies totaled Rs5 billion, and interest payments on PHPL loans and IPP settlements accounted for Rs70 billion.
Pending generation costs under quarterly tariff adjustments (QTA) and fuel charges adjustments (FCA) were recorded at Rs31 billion, while K-Electric owed Rs11 billion to the Central Power Purchasing Agency (CPPA). Officials view this financial restructuring as a crucial step toward easing the power sector’s burden and paving the way for future reforms.
