Govt in talks with banks to restructure Rs1.25 trillion power sector debt

In a bid to control circular debt in the power sector, Islamabad has begun discussions with commercial banks to negotiate more favourable terms. As per reports, the loans amount to a staggering 1.25 trillion rupees and restructuring this debt could alleviate fiscal pressure on the budget.

Currently, Pakistan is part of a $7 billion International Monetary Fund (IMF), which mandates austerity measures to help the country escape its economic woes. Part of the fiscal tightening mandated by the IMF can be completed by securing more lenient terms on outstanding loans.

While speaking to a reputable international organisation, Power Minister Awais Leghari revealed that the loan amount would be repaid in approximately five to seven years. According to reports, the term sheets, which contain the terms and conditions of the loan agreement, have not yet been inked as discussions continue.

The government has accrued this debt as it is either the sole owner or largest shareholder of the majority of power companies. However, these state-owned power companies have been posting up large losses, which ultimately Islamabad has to cover.

The aforementioned losses are caused by unpaid bills and subsidies to the power sector. Line losses and administrative inefficiencies have also significantly contributed to generating losses for power companies.

The IMF has recommended several policy measures to counter rising debt levels in the power sector. Islamabad has already raised energy prices at the behest of the international creditor to raise revenues.

However, the national exchequer cannot bear to clear the loans the sector has accumulated over the years. As such, the federal government has reached out to commercial banks to ascertain which banks are interested in helping Islamabad restructure its debt obligations.

According to Leghari, the banking system has the liquidity and appetite to lend funds to the government. This claim holds merit as Pakistani banks have recently had abysmally low Advance Deposit Ratios (ADR). A low ADR means that banks are not issuing sizable amounts of credit to the private sector.

Instead, domestic commercial banks have been lending money to the government or purchasing government bills and securities. Their appetite to issue credit to the government may facilitate ongoing negotiations.

To ensure that the government does not run into similar issues further down the line, lawmakers and relevant authorities have reportedly decided to end ‘government-guaranteed debt’ and transition to a revenue-based system.

Under the revenue model, loans are to be repaid with funds collected from electricity bills. Additional borrowing and requests for subsidies would need to be curbed to ensure the power sector’s financial independence.