Banks sign term-sheet of bailout to address Pakistan's circular debt

Banks in Pakistan have emerged as the last resort to salvage the country’s energy and downstream sectors, agreeing to terms for a bailout to address the massive circular debt.

Under the agreement, banks will roll over approximately PKR 658 billion ($2.3 billion) in term finance certificates, while a fresh cash injection of PKR 617 billion will be provided.

It is worth noting that the IMF has been advocating for a reduction in circular debt, and with this development, Pakistan will be in a stronger position to present its case at the upcoming IMF meeting, as one of the key conditions is set to be fulfilled.

According to people familiar with the agreement between banks and the government-run Central Power Agency, which is responsible for purchasing electricity from generation companies, a term sheet has been signed.

As part of the deal, a fresh loan of PKR 617 billion will be disbursed in due course to address the outstanding circular debt.

“The amount to be resolved stands at approximately PKR 1.25 trillion, with PKR 658 billion rolled over under the umbrella of Pakistan Holding Company (PHLC), having been previously settled through the issuance of term finance certificates,” sources said.

Additionally, PKR 617 billion will be disbursed under the agreement, with banks receiving a rate of return between 10.5% and 11%, based on the Karachi Interbank Offered Rate (KIBOR) minus 0.90%.

The loan repayment will span six years, with consumers expected to pay PKR 3.23 per unit as debt service charges.

Further details indicate that 18 banks will contribute funds in accordance with financial statements from the year 2024.

Out of the total fresh injection of PKR 617 billion, audited accounts show that approximately PKR 98 billion will come from the National Bank of Pakistan, about PKR 81 billion from Habib Bank, nearly PKR 68 billion from United Bank, and around PKR 58 billion from MCB Bank. The lowest contribution, PKR 4.5 billion, is expected from Al-Baraka Bank.

The final terms sheet may reflect minor variations in bank contributions, but any differences are expected to be minimal, sources added.

According to documents from the Finance Ministry, the power sector’s existing circular debt stock stands at PKR 2.4 trillion (2.1% of GDP), with plans to clear it by the end of the current fiscal year.

Under a three-pronged strategy, the government aims to retire PKR 1.5 trillion through fresh borrowing and existing budgetary support.

An estimated PKR 463 billion will be deducted from the circular debt following revised energy purchase agreements with independent power producers (IPPs), while PKR 225 billion will require no further settlement.

Sources also noted that the government is negotiating with IPPs to waive interest payments amounting to PKR 272 billion in exchange for upfront full payments.