ISLAMABAD: A recent 100 basis points increase in the policy rate by the State Bank of Pakistan is expected to raise the financial liabilities of the Central Power Purchasing Agency Guaranteed on loans amounting to Rs1.225 trillion, secured to address circular debt in the power sector.
The financing facility, arranged from 18 commercial banks for a six-year period, is linked to KIBOR minus 90 basis points. It includes Rs659.6 billion in restructured loans and Rs565.4 billion in fresh financing, previously used to retire Rs659 billion in liabilities of Power Holding Limited and clear overdue payments to power producers.
Estimates suggest that a 1% increase in interest rates could add approximately Rs12–13 billion annually to CPPA-G’s repayment burden. However, officials indicate that the existing Debt Service Surcharge (DSS) of Rs3.23 per unit is unlikely to be affected, and consumers may not face immediate additional costs.
There is, however, some uncertainty, as the loan structure tied to KIBOR may delay or limit the immediate financial impact, though future liabilities cannot be ruled out.
In its review under the Extended Fund Facility, the International Monetary Fund noted that Pakistan plans to convert up to 80% of circular debt into CPPA-G debt through Sukuk instruments. This move is expected to reduce interest costs, which have historically contributed significantly to circular debt accumulation.
The IMF also recommended removing the cap on DSS to ensure sufficient revenue for debt servicing. However, the government has retained the surcharge at Rs3.23 per unit after reportedly reaching an understanding with the Fund, indicating that current revenues may be adequate to service the Rs1.225 trillion obligation over the six-year period.
Story b Mushtaq Ghumman
