Two key Pakistani ministers, Muhammad Aurangzeb, the Finance and Revenue Minister, and Sardar Awais Ahmad Khan Laghari, the Energy (Power Division) Minister, are in Beijing to negotiate a rescheduling of Pakistan’s outstanding debts to China. The discussions center around loans tied to the ambitious China-Pakistan Economic Corridor (CPEC), a project that has been a cornerstone of the two countries’ economic relationship.
Pakistan formally requested China to reschedule its debts, with outstanding dues for CPEC power projects reaching Rs 401 billion by the end of the last fiscal year. This represents a 44 percent increase from the previous year. The unpaid debts have strained relations between the two countries, hindering further financial and commercial collaborations.
The Pakistani delegation has requested an eight-year extension for repaying energy debt, a conversion of US dollar-based interest payments to Chinese currency, and a reduction in overall interest rates for both CPEC and non-CPEC Chinese-funded projects. These measures aim to decrease energy costs and secure approval for a USD 7 billion bailout package from the International Monetary Fund (IMF).
While China has been Pakistan’s largest investor, concerns are rising in Pakistan’s financial sector regarding the negotiations. The outcome of the talks could have significant implications for foreign investment and exchange rate stability. Bankers express uncertainty about China’s willingness to grant concessions, but acknowledge that a complete rejection is unlikely.
The IMF has also emphasized the need for structural changes within Pakistan’s power sector to facilitate debt relief. Notably, a USD 2 billion loan from the People’s Bank of China (PBoC) to the State Bank of Pakistan, initially granted in 2018 to bolster Pakistan’s foreign exchange reserves, has been rolled over annually, with the most recent extension occurring in February 2024. However, the State Bank’s decision to halt a USD 1.8 billion profit outflow to Chinese investors in FY24 has added another layer of complexity to the negotiations.
The Finance Ministry has confirmed the meetings held in Beijing, but has not provided details on China’s response to the debt rescheduling requests. These requests are crucial for easing Pakistan’s balance of payments pressure and reducing energy costs. Failure to reach an agreement could further strain relations and hinder future collaborations, particularly as Pakistan has already breached CPEC agreements by failing to make timely payments for power purchased from Chinese plants. This delay has made SINOSURE, the Chinese Export and Credit Insurance Corp, hesitant about funding new CPEC energy projects.
