Moaaz Manzoor

Commercial bank financing is emerging as a pivotal tool to resolve the power sector’s longstanding issue of circular debt, heralding a transformative stride toward a sustainable energy future.

The government has made significant headway in tackling the power sector’s circular debt, with plans underway to reduce it from Rs2.381 trillion to approximately Rs561 billion. This reduction is being facilitated through Rs1,275 billion secured from 18 commercial banks, which will be used to settle Power Holding Limited (PHL) liabilities and clear dues owed to power producers, a key step toward stabilising the sector’s finances.

A Power Division spokesperson shared insights with WealthPK, emphasising the sustainability of this initiative. “This is not a new surcharge, we are using the one that is there.” “The existing Debt Service Surcharge (DSS) of Rs3.23 per unit, already embedded in electricity bills, is now structured to cover both the interest and principal of the Rs1,275 billion loan. Now with this surcharge, the loan is also being repaid,” the spokesperson said.

“This innovative design ensures that the loan, secured at a favourable rate of 0.9% below KIBOR, is repaid without imposing additional burdens on consumers,” said the spokesperson. The spokesperson highlighted the unprecedented nature of this agreement. “Never in history has such an agreement been made.”

The backdrop of this achievement lies in the government’s strategic allocation of Rs1,275 billion, with Rs683 billion directed to settle PHL loans and Rs569 billion to clear interest-bearing arrears owed to power producers, as managed by the Central Power Purchase Agency-G (CPPA-G). The Power Division spokesperson further emphasised the economic ingenuity of this approach. “Now your circular debt is also being paid off from this.”

“By leveraging the existing surcharge to retire both interest and principal, the government ensures fiscal discipline without exceeding the 10% surcharge cap. This mechanism, designed to last six years, aligns with economic principles of debt sustainability by optimising cash flows and reducing fiscal strain,” the spokesperson explained.

The strategic use of commercial bank financing to address circular debt showcases a robust economic model that balances fiscal responsibility with consumer welfare. By repurposing an existing surcharge and securing favourable loan terms, the government is paving the way for a resilient power sector, with reforms poised to enhance efficiency and sustainability further.

Credit: INP-WealthPk