ISLAMABAD: The federal government on Friday took over from the banking industry the Rs391 billion circular debt on account of loans to power sector and brought commodity operations into the public debt to qualify for $2 billion fast disbursing loans from the World Bank and Asian Development Bank.

The debt swap will, however, result in an additional fiscal deficit of 1.8 per cent of GDP (gross domestic product) during the current financial year, over and above the targeted normal budget deficit of 4 per cent of GDP.

Finance secretary Dr Waqar Masood Khan told journalists at a briefing that the additional fiscal deficit would not be treated as normal deficit because this was a one-time measure, although he hinted another round of similar adjustments going forward before resolution of the circular debt and power crisis.

An official said that despite parking of huge circular debt in the public domain, the government will have to increase electricity tariff by about 14 per cent or else another Rs76 billion of additional circular debt would re-emerge during the current financial year over and above the budgeted subsidy.

Dr Waqar said the circular debt taken over by the government comprised Rs313 billion in power sector loans and the Rs78 billion federal debt in commodity operations.

“The debt was already there but was not shown in books,” the finance secretary said, adding that the government had to take this bitter pill because it was a hindrance in fresh lending.

He said the power sector term finance certificates (TFCs) which carried an exorbitant interest cost of 200 basis points above the Karachi Inter Bank Offered Rate (Kibor) had now been brought into the mainstream lending instruments of Pakistan Investment Bonds (PIBs) and T-Bills.

All banks, led by National Bank of Pakistan, will now purchase PIBs and T-Bills on a 50:50 per cent basis.

The 5-year PIBs will be available to the banking consortium at an average interest rate of two previous auctions while one-year T-Bills will be traded at 11.82 per cent interest rate.

The secretary said the transaction had been completed in consultation with the IMF.

He said the economic team would like the IMF to issue a clean health certificate to Pakistan economy that would help Islamabad secure loans in the form of fast disbursing project loans from the World Bank and the Asian Development Bank.

He said the government was already in contact with the two lending institutions to lend about $2 billion ($1 billion each) to Pakistan’s power sector, after clearance of bad debts.

The fresh loans will be available only after Islamabad agreed to a set of power sector reforms because such World Bank loans are based on performance indicators. He clarified that Pakistan neither required a fresh IMF loan nor it had asked for one because of comfortable balance of payment position despite scheduled repayment of $1.2 billion during the current year.

He said the power sector debt was owing to its losses, uncollected bills and non-payments by provincial governments and Karachi Electric Supply Company.

PAKISTAN RAILWAYS: In reply to a question, the finance secretary said there were innumerable challenges in the Pakistan Railways despite its great revenue potential. He said the railway was a commercial entity whose annual revenue stood at Rs28 billion three years ago, but had now dropped to Rs14 billion and its liabilities had accumulated to Rs48 billion because the freight operation, the main source of revenue, was paralysed with operational bogies drastically coming down to 50 from 400.