Pakistan formally requests China’s debt restructuring

Islamabad:

Pakistan formally asked China on Thursday to restructure its debts, with outstanding debts for China-Pakistan Economic Corridor (CPEC) power projects rising 44 percent to Rs401 billion by the end of last fiscal year. These unpaid debts, in violation of the 2015 CPEC Energy Framework Agreement, hinder further economic and trade relations between the two countries.

Finance Minister Senator Muhammad Aurangzeb and Energy Minister Sardar Awais Laghari met China’s Finance Minister and Chairman of China Export and Credit Insurance Corp (SINOSURE) to discuss the matter. SINOSURE had insured loans taken by Chinese companies from Chinese banks to set up projects in Pakistan.

Pakistani officials have sought an eight-year extension to repay energy debt, convert US dollar-denominated interest payments into Chinese currency and reduce overall interest rates for both CPEC and non-CPEC-funded projects, according to ministry officials. . These measures are aimed at reducing energy costs and securing International Monetary Fund (IMF) approval for a $7 billion rescue package.

The finance ministry said Pakistani ministers met with Chinese finance minister Lan Fo’an in Beijing and had a “useful meeting” with the SINOSURE chairman. Discussions focused on Pakistan’s latest reform agenda, according to the finance ministry. The Pakistani ministers “expressed confidence that SINOSURE will continue to provide its full support for the ongoing and new projects under the second phase of CPEC, now led by the private sector,” the finance ministry said.

But the finance ministry did not confirm whether China had agreed to extend loans or cut interest rates, which are critical to easing pressure on Pakistan’s balance of payments and reducing energy costs.

Pakistan violated CPEC agreements by failing to make timely payments for electricity purchased from Chinese factories. This has made SINOSURE reluctant to finance a new coal-fired power plant and two hydroelectric plants.

Energy ministry documents showed that as of June 2024, outstanding debt at Chinese power plants rose to Rs401 billion, up Rs122 billion or 44% from the previous year. The tariff hike is a major issue in Pakistan’s economic relations with Beijing.

The main reason for the increase is the failure of the Power Department to settle at least 90% of the monthly demands from these power projects. Under the CPEC Energy Framework Agreement, Pakistan had to create a revolving fund with 21% of energy tariffs to protect Chinese companies from the cyclical debt crisis. Instead, Pakistan opened a Pakistan Energy Revolving Account (PERA) at the State Bank of Pakistan (SBP) in October 2022 with annual allocations of Rs 48 billion, but limited withdrawals to Rs 4 billion per month, leading to a current debt of Rs 400 billion Rs.

Energy ministry documents show Pakistan owes Rs 88.3 billion on the imported Sahiwal coal-fired power station, Rs 69 billion on the coal-fired Hub power plant, Rs 70.4 billion on the Port Qasim coal-fired power station and Rs 53 billion in Thar Coal project.

The Chinese government has repeatedly raised this issue with Pakistan through diplomatic channels, including the Pakistani embassy in Beijing and its embassy in Islamabad. In background talks this week, Chinese companies voiced their opposition to any plans to cut their profit margins or renegotiate the 2015 Power Market Agreements.

Details show that requirements for other projects are also rising, with the Engro PowerGen plant at Rs 48.4 billion, the Matiari-Lahore transmission line project at Rs 22 billion and the Karot power project at nearly Rs 13 billion by the end of last month. Thar Coal Energy Limited’s liabilities rose to Rs 8.5 billion, ThalNova’s to over Rs 5 billion, and UEP plant’s claims were less than Rs 3 billion.

According to the finance ministry press release, Finance Minister Muhammad Aurangzeb emphasized the importance of China-Pakistan financial and banking cooperation, thanking China for its support. He briefed the Chinese side on Pakistan’s economic reform agenda, including reforms on tax revenue generation, energy and state-owned enterprises. He described the recently concluded agreement between the IMF and Pakistan as an important factor in carrying out the reform agenda, he added.

Energy Minister Sardar Awais Laghari outlined the ongoing reforms in the energy sector and the government’s commitment to overcoming operational and organizational challenges.