Pakistan’s government has found itself in a challenging position as it tries to address the growing power-sector debt, with commercial banks expressing reservations over its proposed restructuring plan. Despite a recent agreement between the government and the banking sector to extend Rs1.25 trillion in financing to Power Holding Limited (PHL), a state-owned entity, the deal has yet to be finalized, leaving the future of the plan uncertain.
The government had announced last week that it had reached an understanding with the banks to restructure Rs683 billion in existing loans while providing Rs567 billion in fresh lending to PHL at below-market interest rates. The loan would be extended at a favorable floating interest rate of Kibor minus 0.90% per annum, a move the government believes is crucial for stabilizing Pakistan’s power sector, which has long struggled with the accumulation of unpaid bills, power theft, and distribution losses. The goal of the restructuring is to eliminate the circular debt that has plagued the energy sector for years.
However, the enthusiasm from the government’s side is not matched by the banking sector. Despite the announcement, banks have yet to sign the term sheets, and several have raised concerns about the financial viability of the deal. Some banks are reportedly hesitant to proceed with the plan, fearing that it would result in significant financial losses. One senior banker, speaking on condition of anonymity, described the situation as one of coercion, where lenders were effectively pressured into agreeing to the terms. There were reports of threats of dire consequences if the banks did not cooperate, a sentiment echoed by another banking official who compared the pressure faced by the banks to that experienced by independent power producers (IPPs) in their negotiations with the government.
The banks’ primary concern lies in the negative financial impact they will incur under the new terms. The fresh loans would carry an interest rate of Kibor minus 0.90%, significantly lower than the current rate of Kibor plus 0.45% on PHL’s existing liabilities. This translates into a negative spread of 1.35%, which could result in an estimated loss of Rs9.2 billion annually for the lenders. Additionally, the new debt, if approved, would lead to similar reductions in profits. Bankers argue that the frequent restructuring of loans and the negative spread make the deal unattractive, and they worry that extending large sums to the power sector could restrict liquidity for private-sector borrowers and hinder overall economic growth.
Adding to the banks’ unease is the lack of a sovereign guarantee for the new loans, a requirement that Pakistan cannot meet due to the terms of its ongoing bailout program with the International Monetary Fund (IMF). Without this guarantee, banks face increased risk, making the deal even less appealing.
The government plans to repay the debt over six years through a Rs2.83 per unit surcharge on electricity bills, generating an estimated Rs350 billion annually. While this repayment strategy is aimed at easing the debt burden, critics argue that it fails to address the root causes of the power sector’s financial troubles. Power theft and massive transmission and distribution losses continue to drain resources, and without tackling these issues, the plan may offer only a temporary solution. The IMF has expressed skepticism over the proposal, especially given the declining power demand and concerns over the long-term sustainability of debt repayment.
Despite the banks’ concerns, some officials remain hopeful. Zafar Masud, chairman of the Pakistan Banks’ Association, pointed out that over half of the Rs1.25 trillion debt is already on the books of 18 banks, and the repayment will be supported by a surcharge that is already being collected from consumers. He dismissed allegations of coercion and emphasized that the deal would stabilize power prices, promote business activity, and contribute to the overall economic recovery.
Nevertheless, the concerns raised by the banks are not easily dismissed. Without meaningful reforms to address inefficiencies and power theft, the risk of the circular debt problem resurfacing remains high. For now, the government’s ambitious plan to restructure the power sector’s debt is in limbo, with critical questions still to be answered. As discussions continue, the banks’ cautious stance underscores the challenges that lie ahead for Pakistan’s energy sector.