Pakistan seeks debt restructuring from China amid surge in CPEC project payments
Pakistan has formally requested China to reschedule its debts as outstanding payments for China-Pakistan Economic Corridor (CPEC) power projects have surged by 44%, reaching Rs401 billion by the end of the last fiscal year. These arrears, in breach of the 2015 CPEC Energy Framework Agreement, are straining financial and commercial ties 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 address the situation. SINOSURE had provided insurance for loans taken by Chinese companies from Chinese banks to fund projects in Pakistan.
During the meetings, Pakistani officials requested an eight-year extension for repaying the energy debt, conversion of US dollar-based interest payments to Chinese currency, and a reduction in overall interest rates for both CPEC and non-CPEC projects funded by China. These measures are aimed at lowering energy costs and securing approval for a $7 billion bailout package from the International Monetary Fund (IMF).
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The finance ministry reported that the discussions with Chinese Finance Minister Lan Fo’an and SINOSURE's president were constructive. The Pakistani delegation expressed confidence that SINOSURE would continue its support for ongoing and new projects under the second phase of CPEC, which is now driven by the private sector.
However, the finance ministry did not confirm whether China agreed to the proposed loan extensions or interest rate reductions, which are crucial for alleviating Pakistan’s balance of payments issues and reducing energy costs.
Pakistan has struggled to adhere to CPEC agreements by failing to make timely payments for power purchased from Chinese-operated plants. This has led SINOSURE to hesitate on financing a new coal-fired power plant and two hydroelectric plants.
According to power ministry documents, as of June 2024, outstanding dues to Chinese power plants have risen to Rs401 billion, an increase of Rs122 billion or 44% from the previous year. The rise in dues is a major concern for Pakistan’s economic relations with China.
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The surge is attributed to the Power Division’s failure to settle at least 90% of monthly claims from these power projects. Under the CPEC Energy Framework Agreement, Pakistan was required to create a revolving fund with 21% of power invoices to shield Chinese firms from the circular debt crisis. Instead, Pakistan established a Pakistan Energy Revolving Account (PERA) with an initial allocation of Rs48 billion, but limited withdrawals to Rs4 billion per month, resulting in the current Rs400 billion debt.
The power ministry documents indicate that Pakistan owes Rs88.3 billion to the Sahiwal coal-fired power plant, Rs69 billion to the Hub coal-fired project, Rs70.4 billion to the Port Qasim coal-fired plant, and Rs53 billion to the Thar Coal project.
The Chinese government has repeatedly raised concerns with Pakistan through diplomatic channels, including communications through Pakistan’s embassy in Beijing and China’s embassy in Islamabad. Chinese companies have expressed strong opposition to any plans to reduce their profit margins or renegotiate the 2015 Power Purchase Agreements.
Receivables for other projects are also increasing, with the Engro PowerGen plant at Rs48.4 billion, the Matiari-Lahore Transmission Line project at Rs22 billion, and the Karot power project at nearly Rs13 billion by the end of last month. Payables for Thar Coal Energy Limited have risen to Rs8.5 billion, ThalNova’s to over Rs5 billion, and UEP power plant’s receivables to under Rs3 billion.
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According to the finance ministry’s press statement, Finance Minister Aurangzeb emphasized the importance of China-Pakistan financial and banking cooperation and expressed gratitude for China’s support. He briefed the Chinese side on Pakistan’s economic reform agenda, which includes tax revenue generation, energy sector reforms, and state-owned enterprise improvements. He also highlighted the recent IMF agreement as a crucial step in implementing these reforms.
Energy Minister Sardar Awais Laghari detailed ongoing energy sector reforms and the government’s commitment to addressing operational and organizational challenges.
Source: Express Tribune