Circular debt restructuring done, but the problem remains

The circular debt restructuring financing deal has finally been signed. It is a good deal—no doubt about it. The credit goes to M. Ali and his team, and to those anonymous analysts who first initiated the idea. BR Research first saw a raw concept of such a deal in 2019, and six years down the road, the first phase has finally closed. That is the speed at which Pakistan works.

The signing covers Rs1,225 billion. Out of this, Rs660 billion is a straightforward restructuring of loans. Earlier, banks with sovereign guarantees were getting K plus rate. Now, without any guarantee, banks are getting around 150 bps less at K minus 90. That is not sweet for banks, but in the greater national interest they agreed to it. Here, the credit goes to SIFC for negotiating this with eighteen banks.

The other Rs565 billion—due to IPPs—is the tricky part. It is supposed to be fresh lending by banks, with the amount to be paid to IPPs if they waive LPS, which in total is around Rs1 trillion. The spoiler was the Chinese refusal to waive LPS. M. Ali and his team smartly worked to clear the debt of those IPPs who agreed to waive LPS. The IMF has no issue with this, and they may wait for the Chinese to agree someday.

Around Rs250–300 billion out of the Rs565 billion is CPEC IPPs overdue (plus Rs150 billion LPS—out of the Rs1 trillion total LPS). As of now, the drawdown would be Rs660 billion plus Rs565 billion minus Rs250–300 billion (CPEC IPPs dues). Thus, the total drawdown might be Rs900–950 billion, and the remaining circular debt will stay intact until the Chinese agree.

With all the nuances and delays, this is a settlement of existing circular debt stock with no contribution towards the growing flow, which increased by Rs47 billion last month. Another issue is the escalation of the Rs3.23 per unit surcharge that consumers are already paying.

When interest rates were at 22 percent, the cost of servicing this loan was Rs3.23 per unit. Now, with the policy rate halved and negative margins for banks, this amount is enough to service the complete debt in six years. On the face of it, it looks like magic. However, the Rs3.23 can increase if interest rates move up and/or grid consumption falls.

The latter is likely, as grid consumption is expected to fall due to rapid solarization and battery storage. Prices of these renewables are falling like ninepins, and load keeps shifting away from the grid. The government is not revising the net metering policy, which is illogical. Meanwhile, the petroleum ministry is fighting for lower levies on gas and furnace oil use for captive players. If it succeeds, grid load will fall further.

Thus, there is a risk of growing DSS, and that burden will fall on consumers, who are already paying for government inefficiencies. Meanwhile, circular debt will keep piling up, and in a few years, another such plan (or direct fiscal support from taxpayers’ money) will be needed. Some may recall that Rs500 billion in circular debt stock was cleared through fiscal injection in 2013, and now Rs900–1,200 billion is to be cleared through debt restructuring in 2025.

The question remains: when will this be solved, and when will the energy sector reform? Consumers gain nothing from settling stocks unless the flow is addressed.