Islamabad:
Two Chinese commercial banks have tied their $600 million loans to the earlier settlement of debt owed by Pakistan to Chinese power plants – a term Islamabad has refused to accept because of its budgetary implications and setting a wrong precedent.
Government sources told The Express Tribune that prospects of securing the $600 million Chinese commercial loan have dimmed due to the new situation. Pakistan will receive an unconditional Chinese trade loan, they added.
Pakistan was in negotiations with the Industrial and Commercial Bank of China (ICBC) and the Bank of China for a total loan of $600 million. Each bank had been approached for $300 million in financing. Pakistani authorities hoped to receive the loans in December. Finance Ministry spokesman Qamar Abbasi did not respond to questions sent to him. However, a senior finance ministry official said the government would not accept the Chinese terms, which were unprecedented given the nature of the loan facility.
In recent years, China has helped Pakistan avoid bankruptcy. But the Chinese are also frustrated at the lack of implementation of agreements signed under the umbrella of the China-Pakistan Economic Corridor (CPEC). The power plants had been set up under CPEC.
The Chinese have provided loans from SAFE deposits, soft loans and commercial loans to help Pakistan stabilize its external sector. In June last year, China helped Pakistan avoid a further decline in its extremely low foreign exchange reserves by early adjusting its $1.3 billion repayment.
The sources said both commercial banks have linked their loans to the pending payment to Chinese Independent Power Producers (IPPs). Chinese banks told Pakistan that they would provide a list of outstanding debts and the $600 million would be disbursed subject to the settlement of their debts.
Under the CPEC Power Framework Agreement, Pakistan had committed to create a revolving fund and deposit an amount equal to 21% of the invoices generated for electricity payments. 21% is the amount that the Pakistani authorities are unable to collect, adding to the vicious circular debt of the power sector. The deal was intended to protect Chinese businesses from cyclical debt.
However, instead of creating a fund, Pakistan in October 2022 opened a Pakistan Energy Revolving Account (PERA) at the state bank of Pakistan with annual allocations of Rs 48 billion on the condition that it withdraw a maximum of Rs 4 billion per month. As a result, the debt of Chinese IPPs now hovers around Rs 400 billion.
The government sources said the Chinese condition for the IPP debt arrangement came at a later stage, as both sides had already agreed to the terms of the loans. Unlike in the past, this time, Beijing had decided to give the $300 million equal to Chinese RMB. The Bank of China had offered to disburse the loan from abroad. ICBC had planned to disburse funds from Pakistan.
The sources said the interest rate on the new trade facility was agreed at 6%, but ICBC wanted to charge an additional 2.5% to offset the impact of a withholding tax.
Reading $600 million commercial loan linked to IPP debt
The government has informed the International Monetary Fund that the $6.5 billion loan plan is dependent on macroeconomic conditions. Pakistan has budgeted $4.5 billion in foreign commercial loans, but has so far received no funding due to poor credit ratings, high risks to debt sustainability and weak macroeconomic conditions.
The sources said the finance ministry was of the view that Chinese commercial lending cannot be attached to any conditions. as such terms are acceptable only in case of program loans. Interest rates on commercial loans are relatively higher than program loans.
The government also has no funds in the budget to clear the debt of Chinese IPPs and cannot issue a supplementary grant due to the condition imposed by the IMF. There were also concerns that the federal cabinet might not approve the conditional external commercial loan.
When contacted, however, Chinese officials said the Chinese side, in collaboration with Pakistani counterparts, is working diligently to complete the project on time. However, they pointed out that the allegation that Chinese commercial banks have made the provision of loans conditional on settlement of debts of Chinese IPPs by Pakistan is not accurate.
As of 2017, the largest percentages of Chinese development financing have been bailout loans, rather than development projects, which were the hallmark of CPEC in its heyday from 2014 to 2017, when large new commitments were expected, it wrote AidData, a Western research laboratory. in its latest report.
Three international credit rating agencies have downgraded Pakistan, which has raised its borrowing costs and created barriers to arranging new commercial loans abroad. Pakistan had also budgeted $1.5 billion in Eurobonds, but last month caretaker finance minister Dr Shamshad Akhtar shelved the plan.
The senior finance ministry official said foreign exchange reserves have started to increase due to recent loans from the Asian Infrastructure Investment Bank, the World Bank and the Asian Development Bank. They said the central bank has also bought dollars from the open market. As a result, official foreign reserves are over $8.2 billion, and the IMF’s board is also expected to approve a $700 million tranche this Thursday. The local currency has appreciated in recent months despite massive purchases of foreign currency by the central bank and a relatively low level of foreign reserves. The rupee-dollar rate remained marginally above Rs 281 to a dollar on Monday.
Published in The Express Tribune, January 10u2024.
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