Bank Borrowing to Settle Circular Debt Amid Rising Electricity Costs
ISLAMABAD — In a major move to stabilize Pakistan’s cash-strapped power sector, the government on Friday approved the issuance of a Letter of Comfort in favour of banks to secure the disbursement of a Rs1.23 trillion loan. This facility aims to settle outstanding circular debt, with the government taking responsibility should the power sector fail to repay the borrowed amount.
The decision was taken during the Economic Coordination Committee (ECC) meeting of the cabinet, chaired by Finance Minister Muhammad Aurangzeb. Alongside the Letter of Comfort, the ECC approved the waiver of Rs120 billion in late payment interest owed by the Pakistan Atomic Energy Commission (PAEC) to its fuel suppliers and sanctioned passing on Rs22 billion of the financial obligation to gas consumers under the same arrangement.
The committee also greenlit Rs659.6 billion in sovereign guarantees to facilitate circular debt financing of Rs1.225 trillion, covering Power Holding Limited’s (PHL) liabilities and overdue payments to independent power producers (IPPs). Last month, the government and commercial banks had signed financing and security agreements for the same loan. Electricity consumers will repay the principal and interest through a surcharge of Rs3.23 per unit.
Due to weak fiscal health, banks had initially declined to release the funds, demanding a Letter of Comfort from the Ministry of Finance. With the ECC’s approval, Habib Bank Limited will accept the letter as satisfactory compliance before the first drawdown of the circular debt financing.
The committee also approved Memoranda of Understanding (MoUs) with PAEC, authorizing the Central Power Purchasing Agency-Guarantee (CPPA-G) to execute negotiated settlement agreements based on these MoUs. CPPA-G and PAEC were further empowered to amend agreements as necessary, including filing tariff petitions with Nepra for five nuclear power plants based on debt adjustments.
However, some ECC members raised concerns that these measures would not significantly reduce tariffs, which are expected to rise due to quarterly adjustments and fuel cost revisions.
Additionally, the ECC approved the waiver of Rs119.5 billion in late payment interest, allowing CPPA-G to pay Rs89.5 billion to OGDCL via Uch Power Limited as a lump sum instead of in 18 monthly installments. The government will issue policy guidelines enabling Ogra to adjust Rs21.9 billion into RLNG supply costs.
In a related move, the ECC approved shifting Fertiliser plants including Fatima Fertiliser, Agritech, and Fauji Fertiliser Bin Qasim to the gas supply network of Mari Energies. Mari will supply 170 mmcfd of gas over the next two years from a newly developed field with a $200 million investment. All ten fertiliser plants are now linked to Mari Energies to ensure reliable and affordable supply.
Under the arrangement, raw gas from Ghazij-Shawal will be delivered within Mari’s network, and fertiliser customers will handle processing, compression, injection, and transportation. Gas pricing at delivery points will follow the wellhead price as notified by Ogra. Bilateral gas sale agreements will be executed between Mari and its customers, including SNGPL/SSGCL, with flexibility to supply “swing volume” based on availability.
The ECC also approved reallocating funds within the Ministry of National Food Security to support ongoing agricultural research, allowing a technical supplementary grant transfer from the IPC Division.
