Rs 80 billion TFCs for IPPs/oil companies circular debt finalised: EOBI helps reduce government borrowing from SBP

The banking system went into overdrive on Sunday to help the government reduce its direct borrowing from the banking system by Rs 55 billion cash, the target given by International Monetary Fund (IMF) for availing the second tranche.
The advisor to PM on finance remained personally invloved to bring closure to the issuance of Rs 80 billion TFCs through Pepco to iron out the differences between banks and IPPs/oil companies. The board of directors (BoD) of the Fund is scheduled to meet on Monday, March 30, in Washington to approve the release of funds to Pakistan.
First, the Employees Oldage Benefit Institution (EOBI) withdrew Rs 25 billion from banks to deposit the amount in the State Bank of Pakistan (SBP) to reduce government borrowing from SBP.
Second, by banks and major corporate sector companies involved in oil and gas and production of electricity, are required to deposit advance tax, amounting to Rs 30 billion by the end of this month.
The suppliers of electricity to Pepco and the oil suppliers finally concluded an agreement by late Sunday evening, March 29, 2009, to create term finance certificates of Rs 80 billion to reduce the circular debt.
Earlier, the agreement between banks and the clients ran into snags when issues having the cash flow to pay the quarterly tranche of advance tax were raised.
Around Rs 30 billion is expected to be deposited in the national exchequer by these companies from their existing credit lines.
Some of them were worried that due to liquidity constraint primarily on account of heavy borrowing by the government from the financial system their existing credit lines could be deactivated or reduced. Only upon assurances provided by banks that they would continue to avail the existing quantum of credit available to them the companies like Hubco and Parco agreed to the terms of the agreement. The amount of Rs 80 billion, to be raised from 10 banks--National Bank, Bank Alfalah, Allied Bank, Habib Bank, United Bank, Askari Bank, MCB Bank, Citibank, Standard Chartered Bank, and Bank Al-Habib--would settle the bank loans obtained by Pepco, Hubco, AES Colpir, AES Pakgem, SSGC, PSO, Shell, Parco, NRL, and PRL.
An exhaustive exercise was undertaken to net off as to which power generating companies owes to which OMC, and which OMC has outstanding against which refinery. This exercise reduced the circular debt of over Rs 250 billion to a net figure of Rs 80 billion.
On completion of this exercise, the Advisor to Prime Minister of Finance, Shaukat Tarin, held at least two meetings to persuade the banks to participate in the TFCs offer. Reluctance of the bankers was reportedly overcome when State Bank of Pakistan Governor Salim Raza stressed upon the bankers that the other option would be withdrawal of government and public sector deposits--banks reportedly hold Rs 600 billion plus in governmental deposits.
It may be recalled that withdrawal of Rs 40-50 billion of deposits in the last quarter of 2008 by government entities to retire the overdraft of SBP had sent the interbank overnight borrowing rate to soar above 20 percent. It was feared that a repeat of last year would be far more damaging for the banks.