Power sector: resolution of circular debt in sight

ISLAMABAD: The government and commercial banks are reportedly inching towards a viable deal on Rs 1.23 trillion loan to resolve power sector Circular Debt (CD) of which Rs 5.23 billion will be fresh exposure whereas existing loan of Rs 700 billion will be restructured at a lower rate, well-informed sources told Business Recorder.

An insider revealed that a team of Power Division visited Karachi to hold meetings with the representatives of commercial banks, and warned the banks plainly that if they do not agree on new exposure and retaining of existing exposure, then not only will the entire power sector sink but so would the banks, adding that the next day banks teams were in the Finance Ministry for talks.

According to another senior official, the consortium of banks will comprise of 15-20 commercial banks with whom negotiations are in progress. The loan will be retired in 2-3 years. Currently, power sector circular debt stands at Rs.2.3 trillion.

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Though the government wants to acquire the entire amount of Rs 1.23 trillion at 6 per cent fixed rate till its maturity but the banks are unwilling to lend at this rate, which implies that agreement may get the loan at 7 or 7.5 per cent. However, this is not yet firmed up as banks have not shared their term sheets with the authorities as of now.

According to Minister for Power, the loan that will be borrowed to resolve power sector’s circular debt will be retired through Debt Servicing Surcharge (DSS) of Rs 2.83 per unit which will be enough for this purpose and no new surcharge or tax will be imposed on consumers.

An official told this scribe that the proposal of power sector circular debt retirement plan has also been shared with the International Monetary Fund (IMF) in a cursory way as any concrete proposal cannot be presented until banks share their term sheets.

Another official argued that the IMF would not have any objection to the plan as expensive loans will be replaced with comparatively cheaper loans.

According to sources, the Task Force has shared power sector circular debt reduction plan with the Finance Ministry according to which Rs 300 billion has already been saved through waiver of Late Payment Interest (LPI) whereas a similar amount is also expected to be saved through ongoing negotiations with GPPs (government owned).

Currently, power sector and petroleum sector circular debt reduction plans are targeting the elimination or reduction of circular debt of Rs 5 trillion of which share of petroleum sector is Rs 2.7 trillion.

On January 23, 2025, Prime Minister Shehbaz Sharif, while presiding over a meeting of Power Sector Task Force, directed that the Task Force in coordination with the Petroleum Division prepares a detailed proposal on the reduction of petroleum sector circular debt for presentation to the Prime Minister.

The sources said, different formulas will be used to eliminate company-wise circular debt so that books of all the companies are cleaned to enable them to invest more and to get rid of interest payments. Some companies have reserves, whereas some have liabilities. Currently, due to interest, companies are making losses whereas banks are making money.

Copyright Business Recorder, 2025