Govt’s Rs1.25 Trillion Bank Loan Plan to Tackle Circular Debt – What It Means for Energy Sector & Banks

Pakistan’s government is considering borrowing Rs1.25 trillion from commercial banks to reduce the circular debt crisis that has been crippling the power sector. According to a report by Topline Securities, discussions are ongoing, and an agreement is expected soon.

What is Circular Debt & Why It’s a Problem?

Circular debt refers to the continuous chain of non-payments in Pakistan’s energy supply system, where power producers don’t receive payments from distribution companies, leading to a financial burden on the government and higher electricity costs for consumers.

This situation not only affects the energy sector but also slows down economic growth by discouraging investment in power generation and infrastructure.

Govt’s Plan – How Will It Work?

  • The government is negotiating with commercial banks to secure Rs1.25 trillion, a significant portion of which will go toward restructuring Rs683 billion of existing debt under Power Holding Limited (PHL).
  • The debt restructuring is expected at KIBOR + 2%, a move aimed at reducing late payment charges to independent power producers (IPPs), which currently range from KIBOR + 2% to 4.5%.
  • The funds will be used to retire old, expensive debt and enhance liquidity in the energy sector, allowing companies to pay off existing obligations and invest in new projects.

Impact on the Energy Sector

This financial relief will benefit listed energy companies by providing much-needed liquidity. Companies engaged in power production and oil & gas exploration could use the inflow of capital for growth—such as exploring new wells and increasing shareholder payouts.

How Banks Will Be Affected

While banks are expected to benefit from the large-scale lending, Topline Securities estimates they may face a Rs10-11 billion hit on their profits due to restructuring, which accounts for about 2% of the sector’s total earnings.

However, since the government intends to recover this loan from consumers over 5-6 years, banks will be compensated in an amortized structure, ensuring a steady repayment process.

Final Thoughts

This move by the government aims to ease financial pressure on the power sector while ensuring banks are not overly burdened. If successfully executed, it could help stabilize electricity prices, attract investment, and reduce financial inefficiencies in the long run. However, its success will depend on the agreed-upon loan terms and the government’s ability to implement repayment plans without putting excessive pressure on consumers.

Stay updated as this financial restructuring unfolds!