Key Takeaways:
– Debt Restructuring Request: Pakistan is seeking to restructure $15 billion in energy debt with China.
– Conversion Proposal: Pakistan wants to convert Chinese coal-fired power plants to local coal.
– Immediate Fiscal Relief Needed: The government needs immediate fiscal space to address its economic challenges.
Senior economic journalist Shahbaz Rana reports that Pakistan’s Finance Minister Muhammad Aurangzeb will travel to Beijing this week as an envoy of Prime Minister Shehbaz Sharif to request the restructuring of $15 billion in energy debt. The visit aims to address several unresolved financial issues facing the government.
Rana details that Planning Minister Ahsan Iqbal will also be visiting China, attending the Global Development Initiative forum from July 11th to 13th. “The finance minister is being dispatched as the PM’s special messenger,” Rana writes, noting that Pakistan’s ambassador to Beijing has been instructed to arrange meetings with Chinese authorities.
A cabinet member, speaking on condition of anonymity, confirmed that the Prime Minister decided the issue of Chinese Independent Power Producers’ (IPP) debt should be immediately taken up for “re-profiling.” The finance minister will carry a letter from the Prime Minister requesting debt restructuring.
The delegation will also convey Pakistan’s request to convert Chinese-imported coal-fired power plants to local coal. Rana mentions that “there is a proposal for the government to help Chinese investors arrange loans from local banks to convert these plants to indigenous coal,” with Habib Bank Limited (HBL) engaged in the process.
China has invested heavily in Pakistan’s energy sector, setting up 21 projects worth $21 billion. Rana explains that these projects were financed with loans at an interest rate equal to the London Interbank Offered Rate (Libor) plus 4.5%. Payments against the remaining Chinese energy debt of over $15 billion are expected to total $16.6 billion by 2040.
The proposal involves extending debt repayments from 10 to 15 years. This extension could reduce the outflow of foreign currency by about $550 million to $750 million annually and decrease prices by Rs3 per unit. However, Rana warns that “due to the extended repayment period, the country will also have to make an extra $1.3 billion payment to China.”
Rana highlights the government’s broader economic challenges, including the need to secure an International Monetary Fund (IMF) deal and manage electricity prices. Despite imposing a record Rs1.7 trillion in additional taxes and raising electricity prices by up to 51%, the government has struggled to conclude the IMF deal or reduce the circular debt, which stands at Rs2.65 trillion as of end-May.
During a visit in early June, PM Sharif requested President Xi Jinping to consider re-profiling the IPPs’ debt and converting the imported-coal-fired power plants. Finance Minister Aurangzeb will seek approval for a mechanism to proceed, though Chinese authorities have repeatedly refused to restructure these deals.
Rana notes that “if China agrees to debt restructuring, the repayment period will be extended to 2040, including interest payments.” This could reduce repayment amounts significantly in the short term but increase the overall cost in the long run.
To save $800 million annually and reduce consumer rates by Rs3 per unit, PM Sharif ordered all imported coal-fired power plants, including three Chinese plants, to convert to local coal. The finance and planning ministers will seek Chinese approval for this project and propose financing with HBL.
Rana reports that five major imported coal-fired power plants with a total capacity of 5,940 megawatts are affected by this proposal, including plants in Sahiwal, Port Qasim, and Hub. Additionally, a 300 MW Chinese plant planned for Gwadar is on hold. Expanding the Thar coal mine to supply these power plants would require an investment of about $480 million.
In conclusion, Shahbaz Rana underscores the urgency of Pakistan’s financial situation and the necessity of Chinese cooperation in restructuring the energy debt and converting power plants to local coal to provide immediate fiscal relief.
