After months of negotiations on term sheets and legal formalities, the government has finalized agreements for a historic loan package of Rs 1.275 trillion with approximately 18 commercial banks to address the growing circular debt in the power sector. The draft agreements are now ready for final approval by the Federal Cabinet.
The loan aims to offset a portion of the circular debt, which currently stands at approximately Rs 2.3 trillion. The government has already secured the International Monetary Fund’s (IMF) endorsement for its circular debt reduction plan, which includes borrowing from commercial banks.
Of the total debt, around Rs 700 billion is currently held on the books of the Power Holding Company Limited (PHL) on behalf of the power distribution companies (Discos).
Under the deal, commercial banks will extend fresh loans amounting to Rs 617 billion at an interest rate of 10.50–11 percent, pegged to the Karachi Interbank Offered Rate (KIBOR) minus 0.2 percent. Repayments will be made over six years through the Debt Service Surcharge (DSS), which is currently charged to consumers at Rs 3.23 per unit in electricity bills. To meet IMF structural benchmarks, the government also plans to uncap the DSS, which currently represents 10 percent of the total revenue of power companies. This will be done through a legislative amendment, enabling the payment of interest and partial repayments of loans raised by PHL that appear on Discos’ balance sheets.
Loan disbursements are expected before the end of the current month so that reduced figures of circular debts are shown in the budget documents.
According to official documents, the government has committed to borrowing Rs 1.252 trillion from commercial banks to repay all outstanding PHL loans (Rs 683 billion) and settle the remaining interest-bearing arrears owed to power producers (Rs 569 billion).
The above deal is positive for PSO, SNGP SSGC, KEL, OGDC, PPL