Rs1.275trn loan to tackle circular debt: CPPA-G likely to sign term sheets with 18 banks

ISLAMABAD: The Central Power Purchasing Agency-Guaranteed (CPPA-G) is likely to sign term sheets with around 18 commercial banks for Rs 1.275 trillion loan to resolve the issue of circular debt of Rs 2.4 trillion at the weekend, sources told Business Recorder.

The entire plan has already been approved by the Task Force on Power which has held meetings with the concerned stakeholders.

The sources said, commercial banks would extend fresh loans of Rs617 billion at 10.50-11 percent mark-up rate based on KIBOR-0.90 basis point to be paid in six years’ time by electricity consumers through Debt Service Surcharge (DSS) at Rs 3.23 per unit.

Power sector: resolution of circular debt in sight

On the issue of reduction in circular debt, Islamabad has promised the Fund to reduce the financial burden on the power sector by converting the existing CD stock to CPPA debt.

Last week, an official told this scribe that negotiations with the banks are going on the language of term sheets to avoid any legal issue in future. The Finance Ministry is in negotiations with the banks.

The consortium, which will extend loans of Rs 1.275 trillion, will include those banks which had already extended a loan to PHL on behalf of Discos whereas some big banks are now part of the consortium, the sources added, without sharing the names of banks.

According to Finance Ministry’s documents, power sector’s existing CD stock is Rs2.4 trillion (2.1 percent of GDP) which will be clear by end-FY25, Rs348 billion via renegotiation of arrears with IPPs (PRs127 billion, of which will be via already-budgeted subsidy for CD stock clearance and Rs221 billion will be via CPPA cash flow); Rs387 billion via waived interest fees; and Rs254 billion via additional already-budgeted subsidy for CD stock clearance.

Rs224 billion in non-interest-bearing liabilities will not be cleared.

The remaining Rs1.252 trillion will be borrowed from banks to repay all PHL loans (Rs683 billion) and to clear the remaining stock of interest-bearing arrears to power producers (Rs569 billion).

The loan will be taken at a rate favourable to that currently paid on the CD stock (a major driver of CD flow and accumulation) and annual payments will be financed through Debt Service Surcharge (DSS) revenues over six years.

Power Minister Sardar Awais Ahmad Khan Leghari argues that after availing of debt facility and other measures circular debt would be reduced to Rs 350 billion.

The DSS will be set at 10 percent of the Nepra-determined revenue requirement, adjusted each year at the time of annual rebasing, as per current practice. In the event that DSS revenues fall short of the annual payment requirement, the DSS will be increased to make up for the shortfall and calibrated to any anticipated future shortfalls in the succeeding year. To facilitate this, the government will adopt legislation to remove the 10 percent DSS cap by end-June 2025 (new end-June 2025 SB). There will be no fiscalisation of any revenue shortfall.

The government will prepare a plan to retire, in a timely way, the interest-bearing CD stock anticipated at the end of FY25 (expected to be no greater than Rs337 billion, a result of gross flows this year), alongside the FY26 budget process, which will not utilise subsidy resources. With one of the primary drivers of CD flow-interest charges on delayed payments to IPPs significantly reduced, CD targets have been set lower. These targets will continue to decline to zero by FY31, the end of the operation.

Copyright Business Recorder, 2025