Government to use Covid-19 fund for interest payment

Pakistan’s economy was in doldrums even before Covid-19 hit. Just recently Moodys issued an alert and placed Pakistan on a watch list of countries that may default on private foreign debt.

On Wednesday, according to a report in The Express Tribune, the federal government. “allowed diverting Rs10 billion from the coronavirus relief funds to pay interest on loans taken to retire circular debt and approved terms of negotiations for debt restructuring to reduce electricity tariffs.”

Further the Economic Coordination Committee (ECC) of the cabinet “allowed allocation of Rs10 billion from the PM’s Covid-19 relief package as a stop-gap arrangement for the payment of interest on the Pakistan Energy Sukuk II for a period of six months or amendment to the Nepra Act whichever is earlier, according to a finance ministry handout.”

The ECC also “approved the terms of reference for negotiations with power generation companies” in order to “reduce the capacity charges of power generation companies through synthetic financing.” However, as the Tribune story pointed out “the government is unlikely to secure any major relief. Currently, the front-loaded tariffs of all the power generating units, whether in the private sector or in the public sector, have resulted in consistently higher tariffs at the consumer end, according to the finance ministry.”

Yet, as per the government’s own estimates, “debt refinancing might face several issues. Depending on the size, each generation project could have a consortium of 5-6 long-term lenders, on average, including banks, local and international DFIs, export credit agencies, bilateral and multilateral as well as private lenders. Refinancing each project, one by one, may not be feasible. Most lenders may not agree to extend their maturities given the credit profiles. Secondly, building consensus in each consortium will take a longer time. Also, the government will have to replace the existing guarantee on the debt portion of the projects with the individual government of Pakistan/sovereign guarantees instruments. According to the terms that the ECC approved, the projects, having three years or more left in their debt, will be eligible for the scheme. The scheme will be applied across-the-board, however, projects having material reasons will be exempted from the scheme. The debt payment to be spread over 10 years after the current repayment period power tariff will be lower than the prevailing tariff during the initial years, however, in the remaining period of 10 years, additional tariffs will be charged to the consumers.”

Leave a Reply

Your email address will not be published. Required fields are marked *