Govt Secures Rs. 1.25 Trillion Loan to Address Circular Debt Crisis

The federal government has finalized an agreement with commercial banks to borrow Rs. 1.25 trillion at an interest rate of less than 11%, as part of a comprehensive strategy to tackle the circular debt crisis threatening the power sector. This new loan arrangement is expected to significantly reduce borrowing costs compared to previous loans, which carried interest rates of up to 14%, and penalties of up to 16% for delayed payments to Independent Power Producers (IPPs), reported Express Tribune. The Rs. 1.25 trillion loan will be recorded on the books of the Central Power Purchasing Agency (CPPA) and will not be included in the country’s overall public debt. The agreement, which was reached after discussions with the International Monetary Fund (IMF), is a key component of the government’s three-pronged plan to eliminate the circular debt stock while addressing its ongoing flow over the next three to four years. Under the deal, commercial banks will lend Rs. 1.25 trillion at an interest rate of 1% below the Karachi Interbank Offered Rate (KIBOR), translating to approximately 10.8%. Although the government initially sought a fixed rate of 8%, banks declined the proposal. The loan will be repaid over six years, with debt servicing funded through an existing surcharge of Rs. 2.83 per unit on electricity bills, which generates approximately Rs. 350 billion annually. In the first year, the government will pay Rs. 135 billion in interest costs, while the remaining Rs. 215 billion will be used to repay the principal. However, rising interest rates could reduce the funds available for principal repayments. The government’s strategy involves retiring Rs. 1.5 trillion of the Rs. 2.4 trillion circular debt stock through a combination of fresh borrowing and budgetary support. Additionally, Rs. 463 billion will be reduced through revised agreements with IPPs, while Rs. 225 billion of the debt will not require settlement. Of the Rs. 1.25 trillion loan, Rs. 683 billion will be used to restructure Power Holding Limited’s debt, which was previously borrowed at KIBOR plus 2%. The remaining funds will be allocated to settle dues for nuclear, LNG, coal, and government-owned power plants. The government is also negotiating with IPPs to waive Rs. 272 billion in interest payments in exchange for upfront payments. Furthermore, Rs. 200 billion in unencumbered land owned by power distribution companies will be used as collateral for additional borrowing.