Pakistan seeks IMF nod for PKR 1.3 trillion circular debt plan

The Pakistan government is set to share with the International Monetary Fund (IMF) a plan to reduce PKR 1.3 trillion ($465 billion) of circular debt during a meeting in which it aims to get the lender's consent.

Sources revealed to Nukta that the government has reached an understanding with domestic banks under which they will provide PKR 1.3 trillion on an interest rate of 10.8%, i.e. 1% less than the Karachi Interbank Offered Rate. The debt would be payable in six years.

The government had been trying hard to get the loan amount on 8% annual return, the sources said.

The government has been able to strike the agreement mainly because of sharp drop in policy rate by 1,000 basis points since June when the central bank started easing the interest rate.

Currently, the interest rate stands at 12%, with room for further cut of 50-100bps. The central bank will announce the new monetary policy on March 10.

State Bank of Pakistan Governor Jamil Ahmed earlier said that debt and interest payments in the current fiscal year would decline by around PKR 1.5 trillion to around PKR 8.3 trillion.

Talks with banks to borrow more than PKR 1 trillion have been going on for the last two months. The move is aimed at ending the rising circular debt, cleaning the government holdings books and those of some of power companies in order to sell them off.

The plan would be finalized next week and will get vetted from the International Monetary Fund during a meeting on the energy sector, the sources said.

Circular debt in control?

The government was able to put a cap on circular debt during the current fiscal year, where estimates were done that the debt might rise by PKR 350 billion. However, with timely decisions and intervention from the government task force to renegotiate agreement with power companies, circular debt in the six months of the current fiscal year recorded a fall of PKR 10 billion.

Following the drop, the circular debt stands around PKR 2.380 trillion. However, in the remaining six months of FY25, it might record a hike, the sources said.

The main reason behind the possible increase is due to expected increase in demand of electricity in the summer season. The IMF wants the government to submit a plan or report on the volume of increase in the circular debt by June 30.

The sources estimated that due to rising demand of electricity, there is a possibility debt might rise by PKR 50 billion, reaching PKR 2.430 trillion.

According to the sources, by the end of the FY22, the debt was around PKR 2.253 trillion, while by the end of the last financial year, it rose to PKR 2.393 trillion. In two years, the circular debt has risen by almost PKR 140 billion.

In the recently held meeting between the IMF and Pakistan, government officials shared that around PKR 1.2 trillion would be raised through borrowing, PKR 300 billion would be settled while around PKR 600 billion would get a waiver under the head of Late Payment Surcharge or LPS, the sources said.

Another proposal has been tabled that the government should charge nearly PKR 2.80 per unit as surcharge to settle the overall loans to be borrowed from the banks in the coming five years, the sources revealed.

'Positive move'

According to Topline Securities, the move is positive for both the government and affected energy sector companies listed on the stock exchange as inflow of fresh liquidity will help them to retire their borrowing and allocate fresh capital for business growth i.e. exploration of new wells or in form of payouts to shareholders.

"In our view, the above-mentioned payment of PKR 220 billion of LNG power plants will flow from Sui companies (SNGP and SSGC) to PSO, OGDC, PPL and MARI, the end beneficiaries of the chain. In case of PSO, we believe, company will opt to partly retire its debt which has mounted to PKR 363 billion as of Dec," it said in a note.

"Payment to coal power is estimated around PKR 50-62 billion, and its major listed beneficiary companies would be Lucky Cement (due to Lucky Electric), Hub Power (due to China Hub, Thar Energy, and Thal Nova). FFC, and THAL also have stakes in coal power plants," it noted.

With this transaction, if it sails through, Topline estimates that banks will get hit of PKR 10-11 billion on their profits which is 2% of the sector profits. However, since government is considering to repay this loan in amortized structure by charging it from consumers in 5-6 years period, the repayment structure to banks will also be known/clear.