Electricity consumers across Pakistan are currently being charged a Debt Service Surcharge (DSS) of Rs3.23 per unit on their monthly bills. This levy is set to continue for the next six years, dedicated to facilitating the repayment of a substantial loan amounting to Rs1,275 billion.
This financial imposition, while not an “additional” charge within the existing framework, is critical for addressing the power sector’s persistent issue of circular debt.
A senior official from the Power Division, familiar with the negotiations, stated that the significant loan, secured by the Central Power Purchase Agency (CPPA) from 18 commercial banks, forms a part of a long-term strategy aimed at finally eliminating the country’s chronic circular debt.
The official disclosed that the term sheet between the CPPA and commercial banks has been finalized, and a summary has been submitted to the federal cabinet for approval. A decision is expected soon after Prime Minister Shehbaz Sharif returns from his official visit to the UAE.
While the Rs3.23/unit surcharge had previously reached its 10 percent ceiling, that limitation has now been removed. According to the official, this decision was made under pressure from the International Monetary Fund (IMF), which regarded the cap as a “structural benchmark.” The government reportedly has no immediate plans to further increase the surcharge.
“This initiative—raising Rs1.275 trillion from commercial banks—is likely to become operational in the third or fourth week of June,” the official commented.
He added that the current circular debt stands at Rs2.381 trillion, which is anticipated to be reduced by Rs1.275 trillion through this loan.
The remaining portion of the circular debt will be addressed through various means, including benefits from lower discount rates, renegotiated power purchase agreements with Independent Power Producers (IPPs), and the termination of six IPP contracts.
The government projects the circular debt to decrease to just Rs300 billion, which it plans to eliminate through improved operational efficiencies.
Under the finalized term sheet, commercial banks will extend a new loan of Rs617 billion at a markup of 10.50–11%, calculated as KIBOR minus 0.90 basis points. This amount will be repaid by electricity consumers over six years through the DSS already incorporated into their bills.
Banks will deduct the DSS amount directly from the source when consumers pay their electricity bills, a mechanism expected to enhance the credit risk profile for lenders.
The official noted that the IMF has authorized banks to provide credit directly to CPPA without requiring a government guarantee. This latest tranche of Rs617 billion supplements an earlier Rs658 billion loan provided to the power sector via Power Holding Limited (PHL), which was backed by a sovereign guarantee. Collectively, these two loans constitute the Rs1.275 trillion figure being utilized to address the sector’s financial challenges.
