Govt set to cut circular debt from staggering Rs2.3tr to Rs561bn as agreed with IMF

• Govt to disburse payments in current or next week.
• Rs1.275 trillion loan to settle PHL and IPP dues.
• Consumers to repay energy sector loan over six years.

In a major financial step aimed at reviving Pakistan’s troubled energy sector, the government is set to slash the power sector’s circular debt from a staggering Rs2.381 trillion to around Rs561 billion by making payments of Rs1,275 billion obtained from 18 commercial banks.

“We are going to disburse in the current or next week the amount of Rs1,275 billion to limit the menace of circular debt in the power sector to close to Rs561 billion as has been promised with the IMF,” a senior official of the Power Division confided to The News.

“The borrowed loan of Rs1,275 billion from commercial banks will be utilised by the Central Power Purchase Agency-G (CPPA-G) to repay all PHL loans (Rs683 billion) and to clear the remaining stock of interest-bearing arrears to power producers (Rs569 billion).

The Central Power Purchase Agency–G (CPPA-G) will dole out the payments and this is how the circular debt will be taken to Rs561 billion that will later be uploaded on the official Power Division website.

“The credit for reducing the circular debt in a big way goes to the Task Force on Power Sector comprising Adviser to PM Muhammad Ali, Lt General Zafar Iqbal, and official experts from SECP, CPPA-G and Nepra which through negotiations with IPPs, cleared arrears of Rs348 billion (Rs127 billion through budgeted subsidy and Rs221 billion paid by CPPA).”

The Task Force, however, in a big deal, has already managed to get Late Payment Interests (LPIs) of IPPs amounting to Rs387 billion waived off. The amount of Rs254 billion has been cleared through an additional budgeted subsidy for circular debt clearance.

However, Rs224 billion in the head of non-interest-bearing and Rs337 billion interest-bearing liabilities meaning that Rs561 billion will stay as circular debt. This remaining stock will be dealt with through reforms and efficiency of Discos.

The electricity consumers will retire the loan of Rs1,275 billion through Debt Service Surcharge (DSS) of Rs3.23 per unit that is already in place and electricity consumers are already paying it through electricity bills, so there will be no new burden on consumers. However, consumers under the latest scenario will continue to pay it for the next 6 years to offload the loan of Rs1,275 billion. He said the surcharge of Rs3.23 per unit is not the new one as it is already in place but it will now last for 6 years to pay the loan.

To a question, he said that the surcharge of Rs3.23 per unit has already reached the 10 % cap and the government does not intend to increase its cap. 

However, on the insistence of the IMF, the 10% cap has been removed as it was a structural benchmark.