$15.4b debt restructuring proposed

Plan aims to extend Chinese energy repayments, reduce consumer burden

Shahbaz Rana May 17, 2024
The IMF is the second global institute after the World Bank that in the past one week has warned about risks to Pakistan’s banking system from high exposure to government debt. photo: file


Days before Prime Minister Shehbaz Sharif’s visit to Beijing, Pakistan has prepared a new proposal to seek $15.4 billion in Chinese energy debt restructuring aimed at lowering energy prices for end consumers.

The proposal involves spreading debt repayments over a longer period. This would, on one hand, reduce the outflow of foreign currency by about $550 million to $750 million per annum and, on the other hand, potentially decrease prices by Rs3 per unit, according to Pakistani authorities involved in the plan’s preparation.

These authorities stated that the government seeks a five-year extension in the repayment of Chinese energy debt obtained for setting up 21 power projects under the China-Pakistan Economic Corridor (CPEC). However, due to the extension in repayment period, the country will also have to make an extra $1.3 billion payment to China, sources said.

Against the existing remaining Chinese energy debt of $15.4 billion, payments by 2040 would total $16.6 billion, according to government sources.

A senior government official stated on Thursday that the proposal has not yet been shared with Beijing and has been developed independently of the International Monetary Fund (IMF).

The Ministry of Energy has not officially commented on this article.

Prime Minister Shehbaz Sharif is expected to travel to Beijing from June 4th to 7th to bolster bilateral relations. Despite Western objections to CPEC, China has remained a steadfast partner of Pakistan, offering assistance amid challenges.

IMF bailout packages have also negatively impacted the implementation of Chinese energy deals due to restrictions on subsidising power purchase prices and a cap on sovereign guarantees, delaying Pakistan Railways’ Mainline-I project.

The IMF and the World Bank have also remained critical of Chinese energy projects.

The timing of the prime minister’s visit may also affect the budget, necessitating its advancement to the early first week of June or postponement until after June 8th.

China has set up 21 energy projects in Pakistan with a total cost of $21 billion, including about $5 billion in equity. Out of these 21 projects, the cost of eight wind power projects was nominal, with the cumulative outstanding debt of these eight wind projects less than $400 million, sources said.

Chinese investors obtained loans for these projects at an interest rate equal to the London Interbank Offered Rate (Libor) plus 4.5%.

According to these deals, the current power tariff structure requires debt servicing repayments during the first 10 years of the deals. This has led to a significant burden on consumers who are paying the interest and principal of these loans through higher tariffs.

Pakistani authorities’ estimates suggest that energy prices can be cut by at least Rs3 per unit if payments are extended by another five years.

Sources mentioned that due to Chinese sensitivities, negotiations may not be easy as Beijing has in the past repeatedly refused to reopen deals. Even if China agrees to reopen these contracts, negotiations would involve the Chinese government, power producers, and Chinese banks.

Sources further mentioned that if China agrees to debt restructuring, the repayment period will be extended to 2040, including interest payments. According to Pakistani authorities, repayment would be $600 million less this year and can be reduced to just $1.63 billion after restructuring.

For the year 2025, debt repayments would decrease from $2.1 billion to $1.55 billion – a benefit of $580 million, sources said. However, the upfront relief would result in more repayments from 2036 to 2040, sources added.

During the recent IMF-Pakistan engagements, the Fund inquired about the government’s plan to reduce electricity prices, according to sources. Pakistani authorities have long been saying that energy prices can be reduced only if China agrees to reopen their contracts.

The Chinese embassy has in the past said that the claimed benefit of energy debt restructuring was many times lower than what Pakistan could achieve by addressing issues of theft and inefficiency in the power sector, estimated in the range of Rs580 billion per annum.

Both PTI and PDM governments explored options to restructure Chinese energy debt to minimise tariff increase requirements. The government had also earlier made an attempt to renegotiate IPPs deals in light of the Mohammad Ali Inquiry Committee report, but China declined to reopen these deals.

These power plants were set up on the assumption that Chinese would relocate their industries to CPEC Special Economic Zones. However, Pakistan could not develop these zones, resulting in surplus electricity. Under these deals, Pakistan is bound to pay idle capacity payments, which would add Rs20 per unit for all plants, including government-owned nuclear and LNG plants.

The government has also informed the IMF that electricity prices may go up by Rs7 per unit from July, imposing an additional burden of over Rs800 billion on consumers.

In June last year, China restructured its $2.4 billion debt provided by the Exim Bank for various projects, providing relief to Pakistan for two years.

Published in The Express Tribune, May 17th, 2024.

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