Pakistan formally requests Chinese debt restructuring
Pakistan formally requested China on Thursday to reschedule its debts, with outstanding dues for China-Pakistan Economic Corridor (CPEC) power projects increasing by 44% to Rs401 billion by the end of the last fiscal year. These unpaid debts, in violation of the 2015 CPEC Energy Framework Agreement, are hindering further financial and commercial relations between the two countries.
Finance Minister Senator Muhammad Aurangzeb and Energy Minister Sardar Awais Laghari met with China’s finance minister and the President of China Export and Credit Insurance Corp (SINOSURE) to discuss the issue. SINOSURE had insured the loans Chinese companies took from Chinese banks to set up projects in Pakistan.
The Pakistani officials requested an eight-year extension for repaying energy debt, converting US dollar-based interest payments to Chinese currency, and reducing overall interest rates for both CPEC and non-CPEC Chinese-funded projects, according to ministry officials. These measures aim to lower energy costs and secure International Monetary Fund (IMF) approval for a $7 billion bailout package.
The finance ministry stated that the Pakistani ministers met with Chinese Finance Minister Lan Fo’an in Beijing and held a “useful meeting” with the SINOSURE president. The discussions focused on Pakistan’s latest reform agenda, according to the finance ministry. The Pakistani ministers “showed confidence that SINOSURE will continue giving its full support for the ongoing and new projects under the second phase of CPEC, now led by the private sector,” said the finance ministry.
However, the finance ministry did not confirm whether China agreed to extend the loans or reduce the interest rates, which are critical for easing Pakistan’s balance of payments pressure and reducing energy costs.
Pakistan has breached CPEC agreements by failing to make timely payments for power purchased from Chinese plants. This has made SINOSURE hesitant to fund a new coal-fired power plant and two hydroelectric plants.
Power ministry documents showed that as of June 2024, the outstanding dues to Chinese power plants surged to Rs401 billion, up Rs122 billion or 44% from the previous year. The increase in dues is a significant issue for Pakistan’s economic relations with Beijing.
The main reason for the surge is the Power Division’s failure to settle at least 90% of the monthly claims from these power projects. Under the CPEC Energy Framework Agreement, Pakistan was supposed to create a revolving fund with 21% of the power invoices to protect Chinese firms from the circular debt crisis. Instead, Pakistan opened a Pakistan Energy Revolving Account (PERA) at the State Bank of Pakistan (SBP) in October 2022 with Rs48 billion in annual allocations, but limited withdrawals to Rs4 billion per month, leading to the current Rs400 billion debt.
The power ministry documents show Pakistan owes Rs88.3 billion to the imported coal-fired Sahiwal power plant, Rs69 billion to the coal-fired Hub power project, Rs70.4 billion to the coal-fired Port Qasim power plant, and Rs53 billion to the Thar Coal project.
The Chinese government has repeatedly raised this issue with Pakistan through diplomatic channels including Pakistan’s embassy in Beijing and its own embassy in Islamabad. In background discussions this week, Chinese companies have expressed opposition to any plans to reduce their profit margins or renegotiate the 2015 Power Purchase Agreements.
Details show that receivables for other projects are also increasing, with Engro PowerGen plant at Rs48.4 billion, Matiari-Lahore Transmission Line project at Rs22 billion, and Karot power project at nearly Rs13 billion by the end of last month. Thar Coal Energy Limited’s payables increased to Rs8.5 billion, ThalNova’s to over Rs5 billion, and UEP power plant’s receivables were less than Rs3 billion.
According to the finance ministry’s press statement, Finance Minister Muhammad Aurangzeb highlighted the importance of China-Pakistan financial and banking cooperation, thanking China for its support. He informed the Chinese side about Pakistan’s economic reform agenda, including tax revenue generation, energy, and state-owned enterprise reforms. He described the recently concluded agreement between the IMF and Pakistan as an important enabler to execute the reform agenda, it added.
Energy Minister Sardar Awais Laghari outlined ongoing energy sector reforms and the government’s commitment to overcoming operational and organisational challenges.