Pakistan Considers Debt Extension Request to China Amid IMF Talks
As Pakistan engages in negotiations with the International Monetary Fund (IMF) for a potential loan, the cash-strapped nation is contemplating a request to China for a five-year extension on its $15.5 billion debt in the Chinese energy sector.
The proposed extension, if granted, would require the consent of both the Chinese government and its Independent Power Producers (IPPs) operating in Pakistan. Altering existing contracts would necessitate protracted negotiations, as highlighted by The News.
Options for Debt Extension
If the Pakistani government proceeds with its request to China, it will embark on extensive negotiations that could lead to several potential outcomes. One option under consideration involves reducing consumer tariffs by Rs 1.1 per kWh from 2024-2029, and Rs 0.9 per kWh from 2030 to 2040. This would result in an overall average tariff reduction of Rs 0.18 per kWh from 2024 to 2040, coupled with a five-year tenor extension for the debt, from 2036-2041.
Implications and Considerations
Extending the debt tenure would have significant implications. Official estimates indicate that the outstanding liability would increase from $15.36 billion to $16.61 billion, a surge of $1.3 billion over five years. In rupee terms, the cost of IPP debt would escalate by Rs 377 billion during the same period.
Pakistani authorities have argued that the current power tariff structure concentrates debt service repayments within the first 10 years, imposing a significant financial burden on consumers during the project's initial phase. They contend that extending the debt tenure would stagger the burden over a more extended period, providing relief to consumers.
Pakistan's energy sector has benefited significantly from Chinese investments through the China-Pakistan Economic Corridor (CPEC), with 21 IPP projects currently underway. These projects include eight coal-fired plants, four hydroelectric facilities, eight wind power installations, and a transmission line. The total outstanding debt owed to Chinese IPPs stands at $15.36 billion.
Negotiation Process
To secure an extension in the IPPs' debt tenor, Pakistan must initiate intensive negotiations at the government-to-government level, followed by discussions with the Chinese IPPs. These negotiations would center on contract modifications, financing costs, and potential concessions to reduce the consumer burden.
IMF Concerns
Concurrent with the debt extension discussions, Pakistan is also engaged in negotiations with the IMF. The IMF has requested detailed disclosures regarding outstanding liabilities related to pensions, state-owned enterprises (SOEs), and subsidies over the next five years.
The IMF's concerns stem from the exclusion of significant liabilities from Pakistan's official records, making it challenging to assess the government's true financial obligations. This lack of transparency has hampered the IMF's ability to gauge Pakistan's overall debt and liability situation.
In conclusion, Pakistan's contemplation of a debt extension request to China is a complex and multifaceted issue. The potential benefits of reduced consumer tariffs and improved cash flow must be carefully weighed against the increased financing costs and the need to address the concerns raised by the IMF regarding undisclosed liabilities.
