Agreement with Banks to Provide Relief on High-Interest Payments Linked to Power Sector Debt
Cash-strapped Pakistan has successfully negotiated a major deal with commercial banks to borrow Rs 1.25 trillion at an interest rate below 11%, aimed at resolving the critical issue of circular debt plaguing the country's power sector, according to reports on Friday.
The circular debt crisis emerged primarily due to the government's delayed payments to Independent Power Producers (IPPs), who supply electricity generated at private plants. These overdue payments led to significant hikes in electricity prices, raising concerns over the sustainability of Pakistan's energy sector.
Significant Interest Savings for Pakistan
The new arrangement reported by The Express Tribune is expected to offer substantial savings, with interest rates approximately 3-5% lower than the existing financial arrangements. Currently, Pakistan pays up to 14% interest to commercial banks on previous loans obtained to tackle the circular debt. Additionally, penalties as high as 16% are charged by IPPs due to delayed payments.
This deal, finalized a day after its details were shared with the International Monetary Fund (IMF) for approval, is seen as a critical step in addressing the economic challenges faced by Pakistan. IMF representatives were informed that while this measure would eliminate the existing circular debt stock, controlling the future accumulation of debt could take another three to four years.
Collaborative Effort by Civil-Military Leadership
The groundbreaking agreement has been celebrated as a significant accomplishment for Prime Minister Shehbaz Sharif’s administration. With direct assistance from Pakistan’s military, the government has launched several initiatives to improve efficiency and reduce the high cost of electricity production and distribution.
The negotiations were driven by a joint civil-military task force dedicated to Structural Reforms in the Power Sector. Final terms of the deal were agreed upon during a high-level meeting held at the Ministry of Finance on Thursday, attended by representatives from both civil and military leadership.
Addressing Rs 2.4 Trillion Circular Debt
Under the terms of the agreement, commercial banks will collectively lend Rs 1.25 trillion to help settle outstanding principal amounts totaling Rs 1.5 trillion. This move significantly reduces Pakistan’s circular debt stock, which currently stands at Rs 2.4 trillion.
However, the IMF highlighted ongoing concerns regarding the continual accumulation of circular debt, despite government efforts to control it. During the first half of the current fiscal year, the government managed to limit the rise in circular debt to Rs 11 billion. Yet, challenges such as inefficiency, theft, and systemic losses mean that fully stemming the annual increase could take several more years.
The successful conclusion of this deal provides much-needed fiscal relief and represents a critical step forward in stabilizing Pakistan’s struggling power sector.