Islamabad:
The Government has reached an agreement with commercial banks to borrow RS1.25 billion at an interest rate of less than 11% as part of its three -pointed strategy to eliminate the threat of circular debt with the viability of the electricity sector soon.
The new agreement is at least 3% to 5% cheaper than interest in existing facilities and sanctions that the Government pays for not making timely payments of energy purchases. The RS1.25 billion debt is taken in the books of the central energy purchase agency (CPPA) and would not be part of the general public debt.
Currently, the Government is paying up to 14% to commercial banks for the loans that it had taken in the past to withdraw the circular debt and a price of up to 16% for independent energy producers (IPP) for not making timely payments.
Understanding has been reached a day after the outlines of the plan were shared with the International Monetary Fund for support, government sources told Express PAkGazette.
With the implementation of the plan, the circular debt stock will be eliminated, but the flow of circular debt would continue for at least three or four years, the global lender was informed during the ongoing conversations.
The agreement has been considered a great success of the Government of Prime Minister Shehbaz Sharif, which with the help of the military, has made numerous steps to reduce the cost of electricity and minimize inefficiencies.
The agreement has been prepared by a combined civil-military workforce for structural reforms in the electricity sector and its modalities were completed in the Ministry of Finance on Thursday in the presence of civil-military leadership.
Prime Minister Shehbaz Sharif has already made the president of the Task Force, Mohammad Ali, as his advisor on privatization. A formal notification is expected soon. Harooon Akhtar Khan has been converted into a special assistant to the Prime Minister on Industries and Production, replacing the minister of the Rana Far Tanveer Hussain industry.
According to the agreement, commercial banks would cumulatively provide RS1.25 billion to the government at a rate of 1% less than the prevailing rate of Karachi Interbank offered (Kibor). This translates into a rate of approximately 10.8%.
The government tried to obtain the loan with a fixed interest rate of 8%, but the banks did not accept it.
Of the total circular debt actions existing by RS2.4 billion RS2.4, it is necessary to reassure the main amounts of RS1.5 billion to eliminate debt actions, said officials who negotiated the agreement to the Express PAkGazette.
As part of the triple strategy, the Government would withdraw RS1.5 billion through new loans and budget support already available. An RS463 billion amount would be reduced from circular debt due to recent energy purchase agreements reviewed with IPP and RS225 billion would not require any agreement.
The details showed that the Government will borrow RS1.25 billion commercial banks, and the RS250 billion space is now available in the budget.
The sources said the Government will negotiate with independent energy producers to renounce interest payments that amount to RS272 billion in exchange for receiving complete payments in advance.
Outside the RS1.25 billion, the RS683 billion will be resolved against the power that has a limited debt. This debt had been obtained in the past at a more Kibor rate to 2%.
The powers of the nuclear plant will obtain RS280 billion, the LNG power plants will obtain RS220 billion and the power plants owned by the government will receive RS5 billion. Coal energy plants will also be resolved.
How the debt will be addressed
The Government will pay the RS1.25 billion debt for a period of six years and will be attended through RS2.83 per average debt service surcharge unit that consumers already pay. It is estimated that RS350 billion is generated every year.
During the first year of the agreement, the Government will pay around RS135 billion in the cost of interest of this debt and the remaining savings of approximately RS215 billion will be used to pay the main loans obtained from these banks.
However, a backdrop of the agreement is that the interest rate will increase with the increase in the policy rate by the Central Bank, which would reduce the space to make main payments.
The Ministry of Finance had previously reached an agreement with commercial banks to liquidate the debt of RS268 billion RS268 billion pia at a fixed rate of 12%, or in case the Kibor falls below this rate, the interest rate will be automatically reduced. At that time, interest rates were 22%.
The Government has already granted RS683 billion irrevocable guarantee against the limited loan of Power Holding. This debt of RS683 billion would also be restructured at 1% less Kibor and guarantees will be used again against new loans.
The lands of RS200 billion not taxed owned by eight energy distribution companies will be used as a guarantee to support the debt of RS200 billion.
The government expects another circular debt of RS463 billion to be reduced through the ongoing renegotations of the IPPS agreements, excluding Chinese electric power plants. A sum of RS224 billion that is part of the existing debt stock related to fuel suppliers or owed to Hydel government plants will not require any agreement.
The flow is still a problem
During the ongoing conversations with the IMF, the flow of circular debt remained a concern, although the government had managed to restrict the flow to RS11 billion in the first half of this fiscal year.
The IMF was told that it will take three to four years to stop the annual increase in circular debt due to inefficiency, theft and losses.
In general, the circular debt had been restricted to RS2.384 billion during the first half of this fiscal year, which again jumped near RS2.48 billion at the end of last month. It was told to the IMF that there was an increase of RS50 billion in the flow of the circular debt in January and that another almost equal amount was added in February.
February figures were provisional and could adjust slightly.
The IMF asked about the reasons behind the greatest expected increase in circular debt in the second half when during the first half there was no increase.
An official of the Ministry of Energy said it will take three to four years to completely stop the flow of circular debt. He said that three energy distribution companies, Gujranwala, Islamabad and Faisalabad, reach the recovery objectives established by Nepra in the current fiscal year.
The official also said that in the next phase, the energy distribution companies of fine and Lahore would achieve the objectives of nepring the recovery, but will take three to four years when the recoveries of Hyderabad, Sukkur and Quetta Power Distribution Improve, he added invoicing companies, he added.
The IMF was informed that the disk support unit was functional in Hyderabad, Lahore and Sukkur energy distribution companies, which would help reduce the flow of circular debt.
During the first half of the fiscal year, the electricity sector suffered RS158 billion in losses due to inefficiency, theft and recoveries of invoices. Little more than half of the losses of RS158 billion were caused by only two energy distribution companies Hyderabad Electricity Supply Company (Hesco) and Sukkur Electric Power Company (SEPCO).
The government of Prime Minister Shehbaz Sharif had not restructured the Hesco and Sepco meetings due to an agreement with the Popular Party of Pakistan (PPP), the government’s ally in the National Assembly that governs the province of Sindh.
The sources said the IMF did not accept the government’s proposal to extend the winter aid package for the industrial and agricultural sectors for the entire fiscal year. The IMF asked about the impact of the winter package on energy generation.
During the month of December, industrial electricity consumption increased by 6.9% and in January the increase was 2.7%, Sardar Awais Laghari, Power’s federal minister, said the special cabinet meeting on Tuesday.
The IMF also did not accept the government’s proposal to renounce the GST in electricity bills to reduce the cost of final consumers.
