The government is in discussions with banks to finalize the term sheet for borrowing Rs1,240 billion as part of its efforts to address the country’s Rs2.381 trillion circular debt. With the discount rate dropping from 22% to 12%, authorities aim to take advantage of lower interest rates before the arrival of the International Monetary Fund (IMF) mission.
Two IMF missions are scheduled to visit Pakistan soon—one focusing on climate finance discussions and the other conducting a review of the country’s progress under the $7 billion Extended Fund Facility (EFF).
According to officials involved in the negotiations, the State Bank of Pakistan (SBP) governor and finance minister are part of the discussions. The government is seeking a loan at an interest rate of 6-7% for seven years, while banks are proposing lending at a KIBOR+1 rate. Once finalized, the loan will be repaid by electricity consumers through a Rs3.23 per unit debt servicing surcharge in the tariff.
Of the Rs2.4 trillion circular debt, Rs720 billion has already been settled, including past dues of six independent power producers (IPPs) whose contracts were terminated and 15 IPPs that shifted to a “take and pay” model. Authorities have also settled Rs450 billion with IPPs, waiving Rs150 billion in late payment surcharges, and addressed Rs286 billion in Water and Power Development Authority (WAPDA) dues without interest payments.
Resolving circular debt is expected to stabilize the power sector as it transitions to a private power market, with plans for privatizing distribution companies (Discos). As of November 2024, circular debt stood at Rs2,381 billion, slightly decreasing from Rs2,393 billion in June 2024. However, losses due to Discos’ inefficiency and under-recovery amounted to Rs170 billion.
Power producers’ payables stood at Rs1.608 trillion, with Rs683 billion in loans parked in the Power Holding Private Company (PHPL). Additionally, generation companies (Gencos) owed Rs90 billion to fuel suppliers. Unreleased budgeted subsidies amounted to Rs5 billion, while PHPL loan interest and IPP payments totaled Rs70 billion.
Pending generation costs under Quarterly Tariff Adjustments (QTA) and Fuel Charges Adjustments (FCA) reached Rs31 billion, while K-Electric owed Rs11 billion to the Central Power Purchasing Agency (CPPA). Addressing these financial challenges remains crucial for stabilizing Pakistan’s energy sector.
