Govt to float bonds to clear circular debt

ISLAMABAD: The government has decided to float bonds and term finance certificates as well as borrow money from big banks in an attempt to retire the circular debt of Rs116 billion that is plaguing the energy sector.

This decision was taken in a high-level meeting attended by representatives of the World Bank, the Asian Development Bank, the finance ministry, the water and power ministry, the petroleum ministry and the Pakistan Electric Power Company (Pepco). The move is aimed at resolving the inter-corporate debt problem permanently.

The circular debt between power distribution companies and oil marketing companies had risen to Rs239 billion, of which the government has targeted to settle Rs116 billion this year. Of the Rs116 billion, the government has provided Rs20 billion so far. For retiring the remaining Rs123 billion, the power distribution companies will take loans from five big banks, which are the National Bank, MCB Bank, Habib Bank, United Bank and Allied Bank.

The power companies will pay this amount, in turn, to the oil marketing companies for clearing their liabilities. On their part, the power companies will receive their outstanding bills from provinces and government departments for clearing bank loans. The power distribution companies and oil marketing companies would also open revolving letters of credit with the banks to avoid problems related to inter-corporate debt in future.

In case a party fails to clear its debt, it will take loans from the banks under the revolving letter of credit and make payments to the other party. However, insiders said that the power companies and the oil marketing companies would not solely depend on the banks for loans because of the huge amount involved which may affect the banks’ lending to other sectors. Owing to that, the meeting decided that corporate bonds, Sukuk (Islamic bonds) and term finance certificates would be issued.

They said the private sector has only floated Rs63 billion worth of bonds, which is less than one per cent of the country’s debt market. This provides room to tap the non-bank market by issuing Islamic bonds and term finance certificates to remove the inter-corporate debt.

Published in the Express Tribune, May 13th, 2010.