Circular debt settlement: Rs 10 billion fiscal relief on account of interest payment

The federal government has estimated Rs 10 billion fiscal relief on account of interest payment after circular debt settlement through issuance of T-bills and Pakistan Investment Bonds (PIBs). Sources in told Business Recorder on Thursday that considering a serious fiscal problem the high burden of interest payment on the exchequer, the government has borrowed billions of rupees worth Market Treasury Bills and PIBs to settle the circular debt issue.
For the current fiscal year, the ministry of finance has estimated Rs 55.7 billion payments on Term Finance Certificates (TFCs), issued in 2009 to resolve the debt problem of power holding companies. However, the high rate of interest put a high burden on the fiscal side and resulted in billions of rupees payment to the banks on account of interest.
Some Rs 312.8 billion were raised through TFCs for settling power sector claims, mainly the power holding company created by the government in mid 2009, for resolving the circular debt problem through issuance of TFCs, which carried government guarantees and the liability of their interest payments also rests with the government.
The investment in these TFCs, however, raised bank's exposure in power sector and acted as a disincentive for further bank lending to this sector. In addition, since these TFCs were issued at a market rate of around 200 bps above Kibor, they entailed huge liability of interest payments for the government resulted in high burden on fiscal side.
The budget estimates for interest payments on TFCs during FY12 stood at Rs 55.7 billion. The government decided to take these loans on its books by transforming them into sovereign debt aimed to address this issue.
To reduce this high burden of interest payment, in November 2011, the government borrowed Rs 391 billion from commercial banks to partially settle circular debt through 12-m T-bills and 5-year PIBs, they said and added that this one-off settlement is a fiscal reform measure that will help government in making substantial savings on interest payments.
Instead of TFCs, which were brought on high interest rates, the 12-m T-bills raised on November 4, 2011 entail interest payments of Rs 22 billion in the second quarter of FY13. Similarly for PIBs, the government will have to pay Rs 11.4 billion in interest payments biannually for the next five years.
In overall terms, the interest payment for both these instruments in FY13 will amount to around Rs 44.5 billion, which is less than the payments projected only for the power sector circular debt in FY12, which was according to budget estimates, stood at Rs 55.7 billion.
According to the Ministry of Finance estimates, if interest payments on TFCs to stay at the level projected for FY12, and if there had been no settlement of circular debt in FY13, this arrangement implies more than Rs 10 billion saving in interest payments for the government in the upcoming year, sources said.