KARACHI: The government is negotiating a Rs1.25 trillion ($4.47 billion) loan with commercial banks to reduce its bulging energy sector debt, the power minister andbanking association said.

Plugging unresolved debt across the sector is a top priority under an ongoing $7bn International Monetary Fund (IMF) bailout, which has helped Pakistan dig its way out of an economic crisis.

`The loan will be repaid over a period of 5 to 7 years,` Power Minister Awais Leghari told Reuters, adding that the term sheets are yet to be signed.

The government, the largest shareholder or owner of most power companies, faces a challenge in resolving debt due to fiscal constraints.

To address this, the government has raised energy prices, as recommended by the IMF, but still needs to settle the accumulated debt.

`We`ve approached many banks, let`s see how many participate. It`s a commercial transaction and they have the choice of participating, however, we think there is liquidity in the system for it and banks have the appetite,` Leghari said.

The government plans to reduce `circular debt` public liabilities that build up in the power sector due to subsidies and unpaid bills this year by eliminating government-guaranteed debt and moving to a revenue-based system.

This approach is expected to lower financing costs, enabling the government to pay off interest and service debt obligations, he added.

`Such repricing of liabilities induces more efficiency, and reduces cost for consumers,` said Ammar Habib Khan, adviser to the power minister.

Zafar Masud, Chairman of the Pakistan Banks Association, told Reuters that the interest rate would be a floating exchange rate and the country`s top banks would participate, in addition to those who are already part of the outstanding loan.

`This will help in clearing up all the debt in the next 4 to 6 years which has been sitting on banks` balance sheets,` he said.

Masud added that more than half of the Rs1.25tr debt is already on the banks` books and is undergoing restructuring through self-liquidating facilities, which currently lack identifiable cash flows to support them.-Reuters