Govt planning to borrow Rs1.25trn from banks to clear circular debt, says brokerage house

In a key development for Pakistan’s power sector, the government was planning to borrow Rs1.25 trillion from the banking sector to retire the circular debt, stated brokerage house Topline Securities in a report on Friday.

Pakistan circular debt crisis is a significant challenge for the country’s energy sector and its broader economy.

The circular debt refers to the cascading cycle of non-payments throughout the energy supply chain.

“As per our channel checks and various news reports, presidents of the different commercial banks attended a meeting in Islamabad yesterday (Thursday) to discuss modalities of the Rs1.25 trillion borrowing being planned by the government to retire circular debt,” the brokerage house said.

Topline informed that as per its discussions with a few banks, “agreement is not yet reached with the government, however, it will be done in next few days as there are still few banks have some concerns over the rate being offered by the government”.

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“This Rs1.25 trillion will include restructuring of existing debt of Rs683 billion held in the balance sheet of Power Holding Limited (PHL) at KIBOR plus 2%,” said Topline, citing its channel checks and media reports.

It highlighted that with this fresh transaction, the government aims to “retire old expensive debt of Power Holding, and reduce late payment charges which it is paying to IPPs at KIBOR plus 2 to 4.5%”.

“We believe, this is positive for the both government and listed energy sector affected companies as the inflow of fresh liquidity in the sector will help them to retire their borrowing and allocate fresh capital for business growth i.e. exploration of new wells or in the form of payouts to shareholders,” said Topline Securities.

The brokerage house added that if the transaction sailed through, it “estimates banks will get hit of Rs10-11 billion on their profits which is 2% of the sector profits”.

“However, since the government is considering to repay this loan in amortized structure by charging it from consumers in 5-6 years period, the repayment structure to banks will also be known,” it said.