Loan Agreement Expected to Address Circular Debt

ISLAMABAD: The Central Power Purchasing Agency-Guaranteed (CPPA-G) is anticipated to finalize term sheets with approximately 18 commercial banks for a loan of Rs 1.275 trillion. This arrangement aims to resolve a substantial portion of the Rs 2.4 trillion circular debt issue, according to sources familiar with the matter.

The comprehensive plan has secured approval from the Task Force on Power, which has engaged in discussions with relevant stakeholders.

Sources indicate that commercial banks are poised to provide new loans amounting to Rs617 billion. These loans will carry a mark-up rate of 10.50-11 percent, based on KIBOR-0.90 basis points, and will be repaid over six years by electricity consumers through a Debt Service Surcharge (DSS) of Rs 3.23 per unit.

Circular Debt Resolution in Sight for Power Sector

To mitigate circular debt, Islamabad has pledged to the International Monetary Fund (IMF) to ease the financial strain on the power sector by converting the existing circular debt stock into CPPA debt.

Negotiations regarding the language of term sheets are ongoing with banks to prevent any future legal complications. The Finance Ministry is actively involved in these negotiations with the banks.

The consortium extending the loans, totaling Rs 1.275 trillion, will include banks that previously loaned to PHL on behalf of Discos, in addition to other major banks.

According to documentation from the Finance Ministry, the power sector’s current circular debt stock stands at Rs2.4 trillion (2.1 percent of GDP). The Ministry aims to eliminate this debt by the end of FY25 through several measures:

  • Rs348 billion through renegotiated arrears with IPPs (Rs127 billion via already-budgeted subsidy and Rs221 billion via CPPA cash flow).
  • Rs387 billion via waived interest fees.
  • Rs254 billion via an additional already-budgeted subsidy.

Rs224 billion in non-interest-bearing liabilities will remain outstanding.

The remaining Rs1.252 trillion will be procured from banks to settle all PHL loans (Rs683 billion) and clear the remaining interest-bearing arrears to power producers (Rs569 billion).

The loan’s interest rate is expected to be more favorable than current rates on the CD stock. Annual payments will be facilitated through Debt Service Surcharge (DSS) revenues over a six-year period.

Power Minister Sardar Awais Ahmad Khan Leghari contends that this debt facility, combined with other strategies, will bring circular debt down to Rs 350 billion.

The DSS will be set at 10 percent of the Nepra-determined revenue requirement, adjusted annually during rebasing, in line with existing practices. Should DSS revenues fall short of the annual payment requirement, the DSS will be increased to cover the deficit. The government intends to enact legislation to eliminate the 10 percent DSS cap by the end of June 2025. Any revenue shortfall will not be fiscalised.

The government will devise a plan to retire the interest-bearing CD stock expected at the end of FY25 (projected to be no more than Rs337 billion) alongside the FY26 budget process, without utilizing subsidy resources. With reduced interest charges on delayed payments to IPPs, CD targets have been lowered, aiming for complete elimination by FY31.