The Pakistani government is in negotiations with commercial banks for a 1.25 trillion Pakistani rupee ($4.47 billion) loan to help alleviate its growing energy sector debt, according to the power minister and the banking association.
Addressing the significant debt issue is a key priority under the ongoing $7 billion International Monetary Fund (IMF) bailout, which has played a crucial role in stabilizing Pakistan's economy.
"The loan will be repaid over a period of 5 to 7 years," said Power Minister Awais Leghari, noting that the term sheets have not yet been finalized.
As the largest shareholder or owner of most power companies, the government is grappling with fiscal constraints that hinder debt resolution. While Pakistan has raised energy prices, as advised by the IMF, the government still needs to address the mounting debt in the sector.
“We’ve approached several banks, and we’ll see how many choose to participate. This is a commercial transaction, so banks have the option to join, but we believe there is enough liquidity in the system and banks are interested,” Leghari commented.
The government aims to reduce “circular debt” — the public liabilities accumulating in the power sector due to subsidies and unpaid bills — this year by eliminating government-guaranteed debt and transitioning to a revenue-based system. This shift is expected to reduce financing costs and help the government meet its interest and debt servicing obligations.
“Repricing these liabilities will lead to greater efficiency and lower costs for consumers,” said Ammar Habib Khan, an advisor to the power minister.
Zafar Masud, Chairman of the Pakistan Banks Association, told Reuters that the loan's interest rate will be floating, and Pakistan’s top banks, along with those already involved in the outstanding loan, are expected to participate.
"This will help clear the debt sitting on banks' balance sheets over the next 4 to 6 years," he said. Masud also noted that more than half of the 1.25 trillion rupees in debt is already held by banks and is currently being restructured through self-liquidating facilities, which currently lack identifiable cash flows to support them.