Circular debt in power sector: Govt could not repay bank loans of Rs136.5b

ECC decides to roll over the debt, taken in 2012, for two more years

ISLAMABAD: The government failed to return loans of Rs136.5 billion that it had obtained from banks to retire circular debt in the power sector, which forced the Economic Coordination Committee (ECC) of the cabinet to roll over the debt for two more years on Thursday.

The main reason for the failure to repay the loans was the postponement of privatisation process of power distribution companies, according to officials of the Ministry of Finance.



The government had promised the International Monetary Fund (IMF) that it would retire Rs335 billion worth of circular debt, parked in Power Holding (Private) Limited, by privatising Faisalabad, Lahore and Islamabad power distribution companies.

The government is already charging 43 paisa per unit as debt servicing surcharge from electricity consumers through monthly bills to service the circular debt. In fiscal year 2015-16, it collected Rs29.3 billion from the consumers under that head, according to an IMF report.

Headed by Finance Minister Ishaq Dar, the ECC decided to roll over the Rs136.5-billion debt for two more years including a grace period of one year, meaning the consumers would continue to pay the interest through their electricity bills.

The loan had been obtained in 2012 for two years. In October 2014, the ECC rolled over the debt for two years after the government could not make repayments, according to a press release of the finance ministry in that year.

Now, it is the second rollover, which suggests that plans to address fiscal woes of the private sector could not achieve the desired results.

Technically, it was not a default, as the government was regularly servicing the debt by collecting the amount from the electricity consumers, said officials of the Ministry of Water and Power.

The government is paying interest to a consortium of seven commercial banks, which is 1.25% above the Karachi Interbank Offered Rate (Kibor).

The ECC approved the issuance of sovereign guarantees by the government in respect of the syndicated term finance facility amounting to Rs136.5 billion for the power sector, according to a statement issued by the finance ministry on Thursday.

“The decision was taken on the request of the Ministry of Water and Power as Power Holding (Private) Limited is a public sector company and will be responsible for arranging the loan amounting to Rs136.5 billion for the power sector companies,” it added.



The circular debt was recorded at Rs321 billion at the end of June 2016 in addition to the Rs335 billion parked in the holding company, according to the IMF report. It means the total outstanding circular debt of the power sector is Rs656 billion.

Failed plans

Under a three-year $6.2 billion IMF loan programme, the government had assured the lender that the circular debt would be retired by privatising the power distribution companies. The plan could not be implemented after the Ministry of Water and Power refused to cooperate.

Now, the government has come up with a revised plan. Under the plan, it wants to divest 10% to 20% shares in three power distribution companies at the Pakistan Stock Exchange and use the proceeds to retire the debt.

Pakistan has promised to the IMF that the initial public offering (IPO) of Faisalabad company will be done by February 2017, to be followed by IPOs of Islamabad and Lahore companies by the end of 2016-17. However, sources in the Privatisation Commission said the government was facing problems in the listing of these companies.

PSM salaries

The ECC also approved the payment of outstanding three-month salaries to the employees of Pakistan Steel Mills (PSM) for the period June to August. An amount of Rs1.14 billion would be paid out of the lease money that PSM received from the Port Qasim Authority.

Still, the PSM employees would be waiting for salaries for the remaining two months. The ECC took the decision a day after the government revealed its intention to give the sick industrial unit on lease to foreign investors.

Published in The Express Tribune, November 11^th, 2016.

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