By Staff Reporter
ISLAMABAD: The power sector secured a lifeline with Rs1.225 trillion in fresh financing from commercial banks to tackle its chronic circular debt, but the industry remains tethered to exchange rate risks for nearly a decade due to dollar-indexed investments, particularly those tied to Chinese power projects, power minister said.
Speaking at a press conference on Friday, Power Minister Awais Leghari said the new syndicated loan, finalised with 18 local banks at a rate of Kibor minus 0.9%, would replace costlier debt of Rs660 billion previously borrowed at Kibor plus 2.5-4% through the Power Holding Company.
The facility, backed by sovereign guarantees, has been vetted by the International Monetary Fund, which raised no objections. The refinancing is expected to improve cash flows, reduce government guarantees, and ease the financial strain on a sector long plagued by inefficiencies and mounting liabilities.
Yet, Leghari cautioned that dollar-linked contracts, primarily from power projects commissioned after 2015 under the China-Pakistan Economic Corridor (CPEC), will keep the sector vulnerable to currency fluctuations for another seven to eight years.
Dollar-Linked Debt Casts Long Shadow
The CPEC projects, which account for over 11,000 megawatts of generation capacity, were financed in US dollars with tariffs and debt servicing tied to the greenback. “The dollar-linked debt will remain sensitive to exchange rate fluctuations for the next 7–8 years,” Leghari said.
He noted that when these contracts were signed during the Pakistan Muslim League-Nawaz (PML-N) government, the exchange rate was Rs100 to the dollar. Today, with the rupee significantly weaker, the capacity charge per unit of electricity stands at Rs18, compared with Rs8-9 had the exchange rate held steady.
Pakistan has repeatedly sought concessions from Beijing on CPEC power terms, but progress has been limited. Leghari did not comment on whether the government is pursuing revisions to post-2015 contracts, as it successfully did with pre-2015 independent power producers and state-owned plants.
Circular Debt Progress Amid Challenges
The minister highlighted significant strides in reducing circular debt, which has dropped from Rs2.4 trillion in March 2024, when the coalition government assumed office, to roughly Rs400 billion today. With the new financing, Leghari projected the remaining Rs390 billion could be eliminated well ahead of the previous six-year target, without passing additional costs to consumers.
Leghari attributed the Rs800 billion reduction to three factors: Rs242 billion from improved performance by power companies, Rs175 billion from macroeconomic stability and declining interest rates, and Rs363 billion from renegotiated contracts with older independent power producers. “This was achieved without coercion,” he said, emphasising the government’s structured approach over temporary fixes.
The minister also took aim at the previous Pakistan Tehreek-e-Insaf (PTI) government, alleging that circular debt ballooned from Rs1.1 trillion in 2018, when PML-N left office, to Rs2.28 trillion by 2022 due to inefficiencies, mismanagement, and alleged fraud. By early 2024, the debt had climbed to Rs2.4 trillion.
Tariff Reforms and Solar Shift
Leghari pointed to tariff reforms that have slashed power rates for industrial users by 38% and for domestic and commercial consumers by 11-18%, despite declining consumption driven by growing solar adoption. Over six million consumers have reduced their usage below 200 units per month by installing solar panels, expanding the protected consumer base from 12 million to 18 million.
The government is also working to phase out a Rs3.23 per unit debt servicing surcharge over the next five to six years, Leghari said, as part of broader fiscal discipline to prevent further debt accumulation and bolster investor confidence.
Favorable Financing Terms
The Rs1.225 trillion facility, secured at Kibor minus 0.9%, marks an improvement over the earlier high-cost borrowing. However, Finance Minister Muhammad Aurangzeb recently noted that some corporates are securing loans at even lower rates of Kibor minus 2-3%, reflecting easing monetary conditions.
Leghari described the new terms as favorable, underscoring their role in enhancing liquidity in the power sector. Pakistan’s power sector has long been a drag on the economy, with circular debt—arrears between power producers, distributors, and the government—straining public finances and deterring investment.
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