With circular debt easing, govt cuts loan by Rs50bn to Rs1.225tr

ISLAMABAD: In a significant move aimed at restructuring Pakistan’s power sector finances, the federal government has scaled back its planned loan from banks by Rs50 billion from Rs1.275 trillion to Rs1.225 trillion.

The revised figure comes after Power Holding Private Limited (PHPL) partially offloaded its liabilities and several key payments were settled, reducing the overall debt burden.

The Board of Directors of the Central Power Purchase Agency (CPPA) has approved the revised loan with a consortium of 18 commercial banks. The ceremony is expected to take place shortly, as Prime Minister Shehbaz Sharif has returned from his six-day visit to China. According to officials, the loan proceeds will be transferred to PHPL to settle outstanding liabilities, which have declined from Rs683 billion to Rs659 billion. The remaining funds will be allocated to Independent Power Producers (IPPs), particularly those nearing the end of their Power Purchase Agreements (PPAs), and to clear dues of China-Pakistan Economic Corridor (CPEC) power projects.

In a parallel effort, the government is engaged in negotiations with 45 wind and solar IPPs. These talks aim to secure a waiver of Rs179 billion in Late Payment Interest (LPI). Sources involved in the discussions indicate that the negotiations are progressing positively and could result in further financial relief for the power sector.

Pakistan’s circular debt has seen a notable decline in recent months-dropping from Rs2.381 trillion to Rs1.614 trillion-thanks to intensive negotiations led by the government’s Task Force on Power. These talks involved over 35 IPPs and led to the termination of six contracts. The cumulative impact of these measures is projected to save the government nearly Rs3.6 trillion over the remaining duration of the agreements. Additionally, the Task Force secured a waiver of Rs387 billion in LPIs and cleared Rs348 billion in arrears. Of this amount, Rs127 billion was covered through budgeted subsidies, while Rs221 billion was paid by CPPA.

Once the Rs1.225 trillion loan is fully disbursed, the remaining circular debt is expected to drop further to Rs339 billion. Officials say this residual amount will be tackled through additional reforms and enhanced efficiency within power distribution companies (Discos).

The repayment of the loan will continue to be managed through the existing Debt Service Surcharge (DSS) of Rs3.23 per unit. Authorities clarified that this surcharge has already been built into power tariffs and will remain in place for the next six years. This strategic financial realignment signals the government’s intent to regain control over the longstanding issue of circular debt while minimising further pressure on electricity consumers. If the current pace of reform is maintained, officials believe it could mark a turning point for Pakistan’s troubled power sector.