ISLAMABAD, Mar 7: Cash-strapped Pakistan has reached a deal with commercial banks to borrow Rs 1.25 trillion at less than 11 per cent interest rate to settle the issue of circular debt related to the power sector, according to a media report on Friday.
The government owed the debt to the Independent Power Producers (IPPs) for failing to pay on time the payment of electricity it purchased from the private plants. The issue had pushed up the prices of power in the country, raising questions on the viability of the power sector.
The Express Tribune newspaper reported that the deal reached with the banks is at least 3 to 5 per cent cheaper than the interest on the existing facilities and the penalties that the government pays for not making timely payments of the energy purchases.
The government is currently paying up to 14 per cent cost to the commercial banks on the loans that it had taken in the past to retire the circular debt and up to 16 per cent price to the IPPs for not making timely payments to them.
The understanding was reached a day after the contours of the plan were shared with the International Monetary Fund (IMF) for its endorsement, the newspaper reported, quoting government sources.
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 to four years, the global lender was informed during the ongoing talks.
The deal has been considered a major success of the government of Prime Minister Shehbaz Sharif, which, with the help of the military, has undertaken numerous steps to reduce the cost of electricity and minimise inefficiencies.
The deal has been worked out by a combined civil-military task force for the Structural Reforms in Power Sector, and its modalities were finalised in the Ministry of Finance on Thursday in the presence of the civil-military leadership.
According to the deal, the commercial banks would cumulatively lend Rs 1.25 trillion to the government as out of the total Rs 2.4 trillion existing circular debt stock, there is a need to resettle the Rs 1.5 trillion principal amounts to eliminate the debt stock, the officials who negotiated the deal told The Express Tribune.
During the ongoing talks with the IMF, the flow of the circular debt remained a concern, although the government had managed to restrict the flow to Rs 11 billion in the first half of this fiscal year.
The IMF was told that it will take three to four years to stem the annual increase in the circular debt due to inefficiency, theft and losses. (PTI)
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