In a significant move for Pakistan’s power sector, the government is planning to borrow Rs1.25 trillion from the banking sector to address the ongoing circular debt crisis, according to a report by Topline Securities released on Friday. The circular debt, a major issue for Pakistan’s energy sector, has long posed a challenge to the country’s economy, with non-payments circulating throughout the energy supply chain.
Topline Securities revealed that a meeting took place in Islamabad involving the presidents of various commercial banks to discuss the details of the Rs1.25 trillion borrowing plan. Although an agreement has not yet been reached, discussions are expected to conclude soon, as some banks still have concerns about the rate being offered by the government.
The planned borrowing will also include the restructuring of Rs683 billion in existing debt held by Power Holding Limited (PHL), with a repayment rate set at KIBOR plus 2%. This restructuring aims to retire old, costly debt and reduce late payment charges paid to Independent Power Producers (IPPs), which currently range from KIBOR plus 2% to 4.5%.
Topline Securities views this initiative as positive for both the government and the listed energy companies, as the infusion of fresh liquidity will help reduce their borrowings and potentially enable further investments in growth, such as exploring new wells or distributing payouts to shareholders.
If the borrowing plan goes through, banks could face a hit of Rs10-11 billion on their profits, which represents about 2% of the sector’s profits. However, the government plans to repay the loan over a 5-6 year period, with charges passed on to consumers, providing a clear repayment structure for the banks involved.
