Decision on borrowing cost put off

Energy ministry proposes change in borrowing rate for power projects

Shahbaz Rana September 20, 2023
Pakistan needs to amend its existing agreements with electricity sellers to align the benchmark borrowing rate with the new one. photo: file


Pakistan on Tuesday deferred a decision on changing its benchmark rate for foreign borrowing to finance power projects due to the absence of crucial information about the financial impact of the decision on electricity prices.

The Economic Coordination Committee (ECC) of the cabinet did not endorse a proposal of the Ministry of Energy about replacing the existing London Interbank Offered Rate (Libor)-based borrowing with a new benchmark – the Secured Overnight Financing Rate (SOFR). The ministry proposed to replace the key debt rate with effect from July this year, both for new and existing projects.

Headed by interim Finance Minister Dr Shamshad Akhtar, the ECC approved the release of a six-month salary for 3,100 employees of the closed Pakistan Steel Mills (PSM).

The factory has been closed since June 2015 but the government is paying salaries and the cost of gas for running the boilers. The last two governments were not able to make a final decision on the fate of the mill, which remains on the active privatisation list.

A press statement of the Ministry of Finance said that the ECC considered a summary regarding transition from Libor to SOFR.

The ECC, after discussion, directed the Ministry of Energy to prepare a detailed analysis of the financial implications of the decision and bring it to the next ECC meeting for discussion and approval.

Pakistan needs to amend its existing agreements with electricity sellers to align the benchmark rate with the new one. The UK’s Financial Conduct Authority had replaced Libor with effect from January 2022.

SOFT is said to be an appropriate benchmark rate for both legacy and new contracts. It is based on the previous day average lending rate but for future contract purposes, SOFR derivatives are used.

SOFR is considered more resilient and robust than Libor and therefore Libor and SOFR are not equivalent, requiring adjustments because of being unsecured versus secured benchmark rates.

Pakistan’s foreign lenders have also recommended to the government to replace the key borrowing benchmark.

However, the ECC did not endorse the energy ministry’s request to issue instructions to the National Electric Power Regulatory Authority (Nepra) for replacing the benchmark rate. Nepra is required to make amendments in the tariff determination and indexation mechanism.

The ECC approved a grant of Rs622 million for paying salaries of six months to the employees of PSM. The Ministry of Industries requested for the release of Rs1.2 billion on account of one-year salary from the amount of Rs10 billion allocated in the budget.

The ECC authorised the Finance Division to approve the payment of the projected net salary for the first six months of financial year 2023-24, which would be disbursed according to the demand of PSM for each month from the already approved budgetary allocation of Rs10 billion, according to the Ministry of Finance’s statement.

PSM has been incurring losses for the past 15 years but still the white elephant is on the government’s list of state-owned entities.

Newly appointed Chief Justice of Pakistan Qazi Faez Isa said on Monday that the apex court had made a mistake by stopping the privatisation of PSM in 2005. As of last fiscal year, PSM had suffered losses of Rs206 billion.

Over the past one decade, the federal government has been paying salaries of the PSM employees and yet successive governments have failed to privatise the sick unit.

So far, the government has sacked 5,679 employees but another 3,100 employees are still working despite the mill being closed since long. The monthly salary bill is Rs104 million for doing nothing, in addition to the cost of keeping the boilers running.

PSM has filed a petition in the Karachi labour court for retrenchment of the remaining 50% workforce.

The Ministry of Planning gave a briefing to the ECC about the trends of major economic indicators and trends in prices of important food items.

The ECC directed the Ministry of National Food Security and Research to prepare and submit regular reports on the availability of stocks, consumption and pricing of all staple items, especially wheat and sugar, to the ECC in order to enable it to monitor the availability and pricing of important commodities.

The ECC also directed the Ministry of Planning to ensure control over undue profiteering and maintain the gap between wholesale and retail prices of essential food items and consumer products through the respective chief secretaries, it added.

Published in The Express Tribune, September 20th, 2023.

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