ISLAMABAD — Cash-strapped Pakistan is moving to restructure more than $15 billion in power-plant debt owed to Chinese energy producers, in a move that threatens to dampen Beijing’s appetite for future investment.
The South Asian nation is already on the hook for about $1.9 billion in unpaid operating bills at 20 China-backed power plants across the country. Most were built under the $50 billion China-Pakistan Economic Corridor (CPEC), a key part of Beijing’s globe-spanning Belt and Road Initiative (BRI).
But Islamabad announced last weekend that it was seeking to restructure $15.4 billion in loans linked to the construction of those China-funded plants.
Pakistan wants to extend the maturity of the loans by five years to save roughly $2 billion in debt-servicing costs over the next several years, according to an official involved in the process who spoke on condition of anonymity because he is not authorized to speak with the media.
Delaying payment could give the government some wiggle room to avoid raising electricity prices in the midst of soaring summertime demand. An energy price hike last year triggered widespread protests.
The surprise announcement came as Pakistan negotiates another bailout package in the range of $6 to $8 billion with the International Monetary Fund (IMF), which has called on Islamabad to stop subsidizing the energy sector.
“It reduces the [debt] burden [of Pakistan] when it comes to negotiating with the IMF,” Aadil Nakhoda, an assistant professor of economics at the Institute of Business Administration (IBA) in Karachi, said of the restructuring plan.
Pakistan’s investment prospects have been dim, hampering its low-growth economy. This month, Saudi crown prince Mohammed bin Salman delayed a visit that Islambad had hoped would generate billions of dollars in business deals.
In a rare bit of good news, however, the United Arab Emirates announced Thursday that it would invest $10 billion in promising sectors of Pakistan’s economy, although more funding from China remains crucial.
Pakistan is aiming to get its proposed debt restructuring approved before Prime Minister Shehbaz Sharif visits China next month. But observers said convincing Beijing could be difficult. The request comes amid tensions between the two countries after a series of deadly militant attacks on Chinese nationals and economic interests in Pakistan.
Abdul Rehman, a Pakistan-based energy market expert, said Chinese officials will not agree to restructure the multibillion-dollar loans.
“China will give new loans, which can be used to repay the existing loans of power projects,” Rehman said. “In this way, the debts will not be restructured and Pakistan’s forex accounts will also get a breather.”
Chinese companies have repeatedly called on Pakistan to settle its outstanding power bills, stoking fears that producers could suspend their operations to force Islamabad’s hand. Pakistan is paying some of the operations’ variable costs, such as fuel, and it is unlikely the Chinese companies would take such a drastic step, Rehman said. But “Chinese power producers’ payment problems will surely affect future Chinese investment in Pakistan,” he added.
This month, Chinese investors called for Pakistan to place funds in a foreign bank account to ensure that debts owed to power producers are paid on time. Pakistan has not accepted this demand, but it is under mounting pressure to placate them as a meeting of the Joint Coordination Committee (JCC) got underway Friday. The body makes decisions for the broader China-Pakistan investment framework, including about future funding and the suspension of existing projects.
“Given its burgeoning economic problems, Pakistan expects major investments from China at the next JCC meeting,” another government official told Nikkei on condition of anonymity. “We fear that Pakistan’s failure to honor commitments to pay Chinese power producers has made our investment pitch to China a very hard sell.”