Power sector: federal cabinet approves Rs1.275trn bank loan to cut circular debt

Pakistan federal cabinet approved on Wednesday Rs1.275 trillion loan from commercial banks at “the lowest-ever rate” to cut its power sector’s circular debt.

The decision was taken for a permanent resolution of the circular debt in the power sector, the Ministry of Energy (Power Division) said.

The loan aims to offset a portion of the circular debt, which currently stands at approximately Rs2.4 trillion.

“Under the plan, Rs1.275 trillion will be acquired from banks at a historic low interest rate — 0.9% lower than the 3-month KIBOR [Karachi Interbank Offered Rate],” it said.

“For the first time, instead of maintaining the circular debt stock at a certain level through previous methods, it will be gradually eliminated with the help of banks.”

Circular debt: Govt in talks with banks to raise Rs1.275trn

The loan of Rs1.275 trillion would be used to clear dues of independent power producers (IPPs) and retire Power Holding Company Limited (PHL) debt, the Power Division said.

“The acquired loan will also be fully retired over the next six years. This move will not impose any additional financial burden on the national exchequer.”

According to the cabinet-approved plan, Rs683 billion of the financing will be used to clear the outstanding dues of the Power Holding Company Limited (PHL) .

The loan will be repaid in 24 semi-annual installments, and the interest rate will be 0.9% lower than the 3-month KIBOR.

An annual repayment cap of Rs323 billion was set, while a maximum repayment limit of Rs1.938 trillion was set in case of increased interest rates in the future.

Business Recorder reported earlier this month that the government had finalised agreements for a historic loan package of Rs1.275 trillion with approximately 18 commercial banks to address the growing circular debt in the power sector.

How will govt clear Rs2.4trn circular debt?

Pakistan government has committed to the International Monetary Fund (IMF) to clear the circular debt by end of fiscal year 2025, according to the IMF report “First Review Under the Extended Arrangement Under the Extended Fund Facility, Requests for Modification of Performance Criteria and Request for an Arrangement Under the Resilience and Sustainable Facility” released last month.

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According to the IMF report, Pakistan government has said that it’s on track to achieve net zero circular debt flow for FY25 and will strive for the same in FY26, through “a combination of timely tariff increases, targeted subsidies, and cost-reducing reforms”.

As per the government commitment, the National Electric Power Regulatory Authority (NEPRA) will continue with timely automatic notifications of regular quarterly tariff adjustments (QTAs) and monthly fuel cost adjustments (FCAs) to capture any gaps between the base tariff and actual revenue requirements that arise during the year, to prevent circular debt flow.

“We [Pakistan government] will ensure the full implementation of the July 2025 annual rebasing (new SB, July 1, 2025), QTRs, and FCAs going forward. All provinces agree not to introduce any subsidy for electricity or gas.”

Of the existing circular debt stock of Rs2.4 trillion (2.1 percent of GDP), the government committed to clear, by end-FY25, Rs348 billion via renegotiation of arrears with IPPs (Rs127 billion of which will be via already-budgeted subsidy for circular debt stock clearance and Rs221 billion of which will be via CPPA cash flow); Rs387 billion via waived interest fees; and Rs254 billion via additional already-budgeted subsidy for circular debt stock clearance; Rs224 billion in non-interest-bearing liabilities will not be cleared.

The remaining Rs1.252 trillion (now Rs1.275 trillion) was committed to be borrowed from banks to repay all PHL loans (PRs 683 billion) and to clear the remaining stock of interest-bearing arrears to power producers (PRs 569 billion), according to the IMF report.