Neelum Jhelum project: Govt rejects higher interest payments on Chinese loan

Exim Bank demands 7% interest against 4.4% on previous financing.


Zafar Bhutta July 09, 2015
Chinese engineers are working in Thatta, Jamshoro, Hyderabad, Matiari and Dadu districts of Sindh. PHOTO: AFP

ISLAMABAD: Pakistan has turned down China’s demand for higher interest payments on a $576-million loan for the Neelum Jhelum hydroelectric power project in Azad Jammu and Kashmir, fearing it may have adverse impact on national finances and foreign currency reserves of the country, officials say.

Though the Pakistan Water and Power Development Authority (Wapda) had expressed its willingness to pay the high interest rate, Prime Minister Nawaz Sharif and his cabinet members dismissed the talk of expensive borrowing and proposed China should be asked to charge the same interest rate as collected on a previous loan for the project.

Read: Hydroelectric power plant: Financiers stop $433m loan for Neelum-Jhelum project

Lenders from the Middle East have already stopped a planned $433 million loan to fund the strategically important 969-megawatt Neelum Jhelum project following the surge in cost estimates to $4.21 billion.

During the previous administration of Pakistan Peoples Party, the project cost had jumped to $2.74 billion from $1.8 billion and now the estimated cost has gone up further to $4.21 billion.

Earlier, the project had to be completed by October this year, but the deadline has been revised to November 30, 2016. Financial close of the project has also not yet been achieved.

Pakistan had kicked off work on the Neelum Jhelum River in Azad Jammu and Kashmir to secure water supplies but India also started developing the Kishanganga hydroelectric power project on the river, which sparked a legal battle between the two countries in the International Court of Arbitration.

According to officials familiar with the developments, Pakistan has placed a request with the Export-Import (Exim) Bank of China, a state bank solely owned by the Chinese government, for a loan of $576 million to meet foreign currency needs of the project. Negotiations on the terms and conditions for the loan were under way through the Economic Affairs Division (EAD).

“However, there are differences over the rate of interest. Exim Bank demands a higher rate of 7% compared to the 4.4% it charged on the previous loan for the same project,” chief financial officer of the Neelum Jhelum Hydropower Company told the Cabinet Committee on Energy in a meeting held in mid-June.

Wapda Chairman Zafar Mahmood expressed the willingness to accept the higher interest payment on the Chinese loan, arguing that the organisation had to bear a far higher interest cost on cash development loans (CDL).

Read: Hydroelectric power: Neelum-Jhelum project receives $32m from Kuwait

However, some cabinet members pointed out that expensive borrowing from foreign sources would have adverse implications for local finances as well as foreign currency reserves of the country. Every effort should be made to get the new loan on the interest already being charged, they said.

It was also emphasised that loan negotiations should reach a conclusion soon preferably before the end of September.

Responding to the emphasis, the cabinet committee decided to press ahead with the negotiations at a fast pace to secure the fresh loan at the interest rate already being charged.

Published in The Express Tribune, July 9th, 2015.

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COMMENTS (13)

Gp65 | 6 years ago | Reply Interesting! Pakistan is willing to give 17% assured return in dollar terms for CPEC but not give 7% for Neelum Jhelum. This too at a time that middle east countries have pulled back their financing for this project.
Bharat | 6 years ago | Reply Why should Pak pay higher interest ? They are a sovereign nation and will make the best decisions. China has lost more than 3.5 Trillion dollars yesterday in the stock slump. They have propped up there economy with debt.
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