Govt moves to cut circular debt amid power tariff relief

The federal government remains locked in negotiations with commercial banks in a bid to reduce the power sector’s Rs2.4 trillion power circular debt, it has emerged.

In discussions with the press, Minister for Power Sardar Awais Legahri announced that these discussions could unlock loans worth Rs1.34 trillion rupees, which would create some fiscal breathing room. He further said that agreements would only be finalised after commercial banks submit their term sheets.

According to credible reports, this could allow for a staggering Rs300-335 billion reduction in the power sector’s circular debt.

Authorities have revealed that the aforementioned loans will be financed via the debt servicing surcharge of Rs3.23 per unit. While the agreement stands under the current administration, reports have highlighted how repayments towards these loans will continue even if political power changes hands in the future.

While the new loans will result in the aforementioned payments, lawmakers in Islamabad intend to reduce the financial strain on users of the national grid.

Recently, Prime Minister (PM) Shehbaz Sharif slashed the power rate for residential and industrial zones by 12 percent and 13 percent, respectively, and Leghari has hinted at further cuts in electricity tariffs.

As per reports, the fall in tariffs could be revised downward in June 2025, when tariffs are rebased. However, the minister has outlined how changes in fuel prices will have to be borne by consumers via fuel cost adjustment (FCA) charges.

According to Leghari, a rise in interest rates or a fall in the value of the rupee could cause the quarterly tariff adjustment (QTA) to change. Moreover, if the procurement of fuel becomes expensive or if global energy prices rise, the FCA charges are likely to change.

Aside from the aforementioned factors, reports suggest that a fall in hydropower generation could also be reflected within the FCA. Given how this news could have rattled users of the national grid, as many could believe that the recent reduction in electricity prices might be revoked in the future, he proclaimed that the recent slash in power rates was based on “solid and sustainable” factors.

There is merit to his claim as the federal government has made great efforts in the recent past to end unfavorable contracts with independent power producers (IPPs). Moreover, Islamabad has also tacked on an additional Rs10 per liter petroleum development levy that, coupled with termination of contracts with IPPs, has allowed for a Rs4 per unit price reduction.