Islamabad, Pakistan, has decided to approach China, its permanent ally, with a formal request to restructure its $15 billion energy debt to help the cash-strapped country out of its financial troubles.
Planning Minister Ahsan Iqbal and Finance Minister Muhammad Aurangzeb will visit China this week, the Express Tribune newspaper reported citing high-level sources.
While Iqbal's visit was planned in advance, the Finance Minister will be sent as special messenger of Prime Minister Shehbaz Sharif, they added. Iqbal is scheduled to attend the Global Development Initiative forum to be held in China from 11 to 13 July.
As the Finance Minister's visit was not scheduled earlier, Pakistan's ambassador in Beijing was instructed to arrange meetings with Chinese authorities, sources said.
A cabinet member, speaking on condition of anonymity, confirmed that the prime minister decided that the debt issue of Chinese independent power producers (IPPs) should be addressed immediately to “reprofile.” According to sources, the Finance Minister will carry a letter from Prime Minister Sharif requesting debt restructuring.
During the June 4-8 visit, Prime Minister Sharif asked President Xi Jinping to consider redefining IP debt and converting imported coal-fired power plants. Aurangzeb will seek approval of a mechanism to proceed, although Chinese authorities have repeatedly refused to restructure these agreements.
The delegation would also formally convey Pakistan's request to convert China's imported coal-fired power plants to local coal. They said there is a proposal for the government to help Chinese investors get loans from local banks to convert these plants to indigenous coal. Sources added that Habib Bank Limited (HBL) is also involved in the process. China has launched 21 energy projects in Pakistan with a total cost of $21 billion, including around $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 percent.
According to government sources, compared to the remaining Chinese energy debt of more than $15 billion, payments through 2040 would amount to $16.6 billion.
The proposal involves extending debt payments from 10 to 15 years. This would reduce foreign exchange outflow by $550 million to $750 million a year and reduce prices by Rs 3 per unit. Under existing IPP agreements, the current electricity tariff structure requires debt service payments for the first 10 years, which places a significant burden on consumers who pay the interest and principal on these loans through higher fees.
However, due to the extended payment period, the country will also have to make an additional payment of $1.3 billion to China, the sources said.
The Cabinet member said Pakistan needs immediate fiscal space and some room to reduce 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 close the deal with the International Monetary Fund. (IMF) or lower electricity prices.
To secure the deal with the IMF, the government imposed a record Rs 1.7 trillion in additional taxes on Pakistan's low, middle and upper-middle income groups. An increase in electricity prices between 14 percent and 51 percent was also approved to raise another Rs 580 billion from residential and commercial consumers.
However, the Finance Ministry 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 can be reached this month. Despite increasing average base tariffs by around Rs 18 per unit in the last two years, the Power Division told the prime minister on Saturday that, by the end of May, the circular debt owed to power companies had risen again to 2.65 trillion rupees (345 rupees). billion more than the level agreed with the IMF.
The government has been unable to give a firm date for agreement at the IMF staff level or reduce the cost of electricity and circular debt.
Pakistani sources indicated that China may not grant further debt concessions until it resolves its outstanding debts of more than Rs 500 billion and ensures the safety of Chinese citizens in Pakistan. IMF bailout packages have hampered energy deals Chinese due to payment restrictions.
If China agrees to the debt restructuring, the repayment period will be extended to 2040, including interest payments. According to Pakistani authorities, the repayment would be $600 million less this year and could be reduced to just $1.63 billion after restructuring.
By 2025, debt payments would decline from $2.1 billion to $1.55 billion, a benefit of $580 million, the sources said. However, the initial relief would lead to further repayments between 2036 and 2040. In April, Prime Minister Sharif ordered all imported coal-fired power plants, including three Chinese plants, to convert to local coal to save $800 million. per year and reduce consumer tariffs by Rs 3 per unit.
The Finance and Planning Ministers will seek Chinese approval for this project and propose financing with HBL.
Planning Minister Ahsan Iqbal and Finance Minister Muhammad Aurangzeb will visit China this week, the Express Tribune newspaper reported citing high-level sources.
While Iqbal's visit was planned in advance, the Finance Minister will be sent as special messenger of Prime Minister Shehbaz Sharif, they added. Iqbal is scheduled to attend the Global Development Initiative forum to be held in China from 11 to 13 July.
As the Finance Minister's visit was not scheduled earlier, Pakistan's ambassador in Beijing was instructed to arrange meetings with Chinese authorities, sources said.
A cabinet member, speaking on condition of anonymity, confirmed that the prime minister decided that the debt issue of Chinese independent power producers (IPPs) should be addressed immediately to “reprofile.” According to sources, the Finance Minister will carry a letter from Prime Minister Sharif requesting debt restructuring.
During the June 4-8 visit, Prime Minister Sharif asked President Xi Jinping to consider redefining IP debt and converting imported coal-fired power plants. Aurangzeb will seek approval of a mechanism to proceed, although Chinese authorities have repeatedly refused to restructure these agreements.
The delegation would also formally convey Pakistan's request to convert China's imported coal-fired power plants to local coal. They said there is a proposal for the government to help Chinese investors get loans from local banks to convert these plants to indigenous coal. Sources added that Habib Bank Limited (HBL) is also involved in the process. China has launched 21 energy projects in Pakistan with a total cost of $21 billion, including around $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 percent.
According to government sources, compared to the remaining Chinese energy debt of more than $15 billion, payments through 2040 would amount to $16.6 billion.
The proposal involves extending debt payments from 10 to 15 years. This would reduce foreign exchange outflow by $550 million to $750 million a year and reduce prices by Rs 3 per unit. Under existing IPP agreements, the current electricity tariff structure requires debt service payments for the first 10 years, which places a significant burden on consumers who pay the interest and principal on these loans through higher fees.
However, due to the extended payment period, the country will also have to make an additional payment of $1.3 billion to China, the sources said.
The Cabinet member said Pakistan needs immediate fiscal space and some room to reduce 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 close the deal with the International Monetary Fund. (IMF) or lower electricity prices.
To secure the deal with the IMF, the government imposed a record Rs 1.7 trillion in additional taxes on Pakistan's low, middle and upper-middle income groups. An increase in electricity prices between 14 percent and 51 percent was also approved to raise another Rs 580 billion from residential and commercial consumers.
However, the Finance Ministry 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 can be reached this month. Despite increasing average base tariffs by around Rs 18 per unit in the last two years, the Power Division told the prime minister on Saturday that, by the end of May, the circular debt owed to power companies had risen again to 2.65 trillion rupees (345 rupees). billion more than the level agreed with the IMF.
The government has been unable to give a firm date for agreement at the IMF staff level or reduce the cost of electricity and circular debt.
Pakistani sources indicated that China may not grant further debt concessions until it resolves its outstanding debts of more than Rs 500 billion and ensures the safety of Chinese citizens in Pakistan. IMF bailout packages have hampered energy deals Chinese due to payment restrictions.
If China agrees to the debt restructuring, the repayment period will be extended to 2040, including interest payments. According to Pakistani authorities, the repayment would be $600 million less this year and could be reduced to just $1.63 billion after restructuring.
By 2025, debt payments would decline from $2.1 billion to $1.55 billion, a benefit of $580 million, the sources said. However, the initial relief would lead to further repayments between 2036 and 2040. In April, Prime Minister Sharif ordered all imported coal-fired power plants, including three Chinese plants, to convert to local coal to save $800 million. per year and reduce consumer tariffs by Rs 3 per unit.
The Finance and Planning Ministers will seek Chinese approval for this project and propose financing with HBL.
