CPPA-G set to sign term sheets with 18 commercial banks for Rs. 1.275 trillion loan
The Central Power Purchasing Agency-Guaranteed (CPPA-G) is on track to sign term sheets with around 18 commercial banks for a substantial Rs 1.275 trillion loan aimed at resolving Pakistan’s mounting circular debt issue, currently standing at Rs 2.4 trillion. The deal is expected to be finalized by the end of this week.
The plan has already been approved by the Task
Force on Power, which has held discussions with all relevant stakeholders.
According to the sources, the commercial banks will provide fresh loans worth Rs
617 billion at an interest rate of 10.50-11 percent, based on KIBOR-0.90 basis
points. These loans will be repaid over a six-year period, with repayments made
by electricity consumers through a Debt Service Surcharge (DSS) of Rs 3.23 per
unit.
Read More Pakistani
Banks overlooking climate change and human rights in loan practices
Key Developments in Circular Debt Resolution
As part of the broader strategy to tackle
circular debt, the government has committed to converting the existing circular debt stock
into CPPA debt,
aiming to ease the financial burden on the power sector. The Finance Ministry
is currently in negotiations with the banks to finalize the term sheet language
to avoid any future legal challenges.
The loan consortium will include banks that
previously extended credit to Power Holding Limited (PHL) on
behalf of Discos,
as well as some of the country’s largest financial institutions. However, the
names of the participating banks have not yet been disclosed.
Documents from the Finance Ministry
reveal that the power sector's circular debt stock stands at Rs 2.4 trillion
(equivalent to 2.1% of GDP). The government plans to clear this debt by the end
of FY25
through a combination of measures, including:
- Rs 348 billion from
renegotiating arrears with IPPs (Independent
Power Producers)
- Rs 387 billion through
waived interest charges
- Rs 254 billion from
additional subsidies for circular debt clearance
However, Rs 224 billion in non-interest-bearing
liabilities will not be cleared as part of the plan.
The remaining Rs 1.252 trillion will be borrowed
from banks to repay PHL loans (Rs 683 billion) and clear interest-bearing
arrears to power producers (Rs 569 billion). The loan will be secured at a rate
more favorable than the existing circular debt stock interest rate, and annual
payments will be serviced through Debt Service Surcharge (DSS) revenues over
six years.
Steps Toward Reducing Circular Debt
Power Minister Sardar Awais Ahmad Khan Leghari
stated that, with the loan and accompanying measures, the circular debt would
be reduced to Rs 350 billion. The DSS will be set at 10 percent of the Nepra-determined
revenue requirement, adjusted annually. In the event of a shortfall in DSS
revenues, the surcharge will be increased to cover the deficit, ensuring the
financial stability of the sector.
Read More Overseas
Chamber terms windfall profit tax undue burden on Pakistani banks
To facilitate this process, the government plans
to remove the 10 percent DSS cap by end-June 2025, through new legislation.
Additionally, there will be no fiscalization of any revenue shortfall, ensuring
that the power sector's financial obligations are met.
Looking ahead, the government intends to clear
the interest-bearing circular debt stock by the end of FY25, which is expected
to be no greater than Rs 337 billion. This will be addressed as part of the FY26
budget, with no reliance on subsidy resources.
With key drivers of circular debt, such as interest
charges on delayed payments to IPPs, significantly reduced, the circular debt
targets are expected to continue their downward trajectory, with an ultimate
goal of eliminating the debt by FY31.
Source: Business Recorder