Pakistan to Restructure USD 15 Billion Energy Debt with China

Islamabad, Jul 9 (PTI) Pakistan has decided to approach its all-weather ally China with a formal request to restructure its USD 15 billion energy debt to help the cash-strapped country wriggle out of its financial woes.

Planning Minister Ahsan Iqbal and Finance Minister Muhammad Aurangzeb would visit China this week, the Express Tribune newspaper quoted highly placed sources as saying.

While Iqbal's visit was pre-planned, the finance minister is being sent as Prime Minister Shehbaz Sharif's special messenger, they added.

Iqbal is scheduled to attend the Global Development Initiative forum to be held in China from July 11 to 13.

As the finance minister's visit was not scheduled earlier, Pakistan's ambassador to Beijing has been instructed to arrange meetings with Chinese authorities, said the sources.

A Cabinet member, speaking on condition of anonymity, confirmed that the premier decided the issue of Chinese Independent Power Producers' (IPP) debt should be immediately taken up for “re-profiling”.

According to the sources, the finance minister will carry a letter from Prime Minister Sharif requesting debt restructuring.

During the June 4-8 visit, Prime Minister Sharif requested President Xi Jinping to consider re-profiling the IPPs' debt and converting the imported-coal-fired power plants. Aurangzeb will seek approval for a mechanism to proceed, though Chinese authorities have repeatedly refused to restructure these deals.

The delegation would also formally convey Pakistan's request to convert Chinese-imported coal-fired power plants to local coal. They said there is a proposal for the government to help Chinese investors arrange loans from local banks to convert these plants to indigenous coal. The sources added that Habib Bank Limited (HBL) is also engaged in the process.

China has set up 21 energy projects in Pakistan with a total cost of USD 21 billion, including about USD 5 billion in equity. Chinese investors obtained loans for these projects at an interest rate equal to the London Interbank Offered Rate (Libor) plus 4.5 per cent.

Against the remaining Chinese energy debt of over USD 15 billion, payments by 2040 would total USD 16.6 billion, according to government sources.

The proposal involves extending debt repayments from 10 to 15 years. This would reduce the outflow of foreign currency by about USD 550 million to USD 750 million per annum and decrease prices by Rs 3 per unit.

According to the existing IPP deals, the current power tariff structure requires debt servicing repayments during the first 10 years, leading to a significant burden on consumers who are paying the interest and principal of these loans through higher tariffs.

However, due to the extended repayment period, the country will also have to make an extra USD 1.3 billion payment to China, sources said.

The Cabinet member stated that Pakistan needs immediate fiscal space and some room for reducing prices, although the overall cost would increase in the long run.

The government's economic challenges have multiplied, and it has not yet been able to conclude the International Monetary Fund (IMF) deal or lower electricity prices.

To secure the IMF deal, the government imposed a record Rs 1.7 trillion in additional taxes on Pakistan's lower, middle, and upper-middle-income groups.
Electricity prices were also approved to increase by 14 per cent to 51 per cent to collect another Rs 580 billion from residential and commercial consumers.

However, the Ministry of Finance has not been able to give a firm date for the staff-level agreement with the IMF. Finance Minister Aurangzeb, a former banker, hopes the deal may be reached this month.

Despite raising average base tariffs by around Rs 18 per unit over the past two years, the Power Division told the prime minister on Saturday that as of end-May, the circular debt owed to power companies had again increased to Rs 2.65 trillion—Rs 345 billion higher than the level agreed with the IMF.

The government has neither been able to give a firm date for the IMF staff-level deal nor reduce the cost of electricity and the circular debt.

Pakistani sources indicated that China might not grant further concessions in debt until resolving their over Rs 500 billion outstanding dues and ensuring security for Chinese nationals in Pakistan.

IMF bailout packages have hindered Chinese energy deals due to restrictions on repayments.

If China agrees to debt restructuring, the repayment period will be extended to 2040, including interest payments. According to Pakistani authorities, repayment would be USD 600 million less this year and can be reduced to just USD 1.63 billion after restructuring.

For 2025, debt repayments would decrease from USD 2.1 billion to USD 1.55 billion — a benefit of USD 580 million, sources said. However, the upfront relief would result in more repayments from 2036 to 2040.

In April, Prime Minister Sharif ordered all imported coal-fired power plants, including three Chinese plants, to convert to local coal to save USD 800 million annually and reduce consumer rates by Rs 3 per unit.

The finance and planning ministers will request Chinese approval for this project and propose financing with HBL.