With all-weather friend China not agreeing readily to reschedule the terms of energy sector loans to Pakistan or to reduce interest rates on them, and the debt burden to Beijing mounting, alarm bells have started to ring in Islamabad. The pressure of Chinese debt burden on Pakistan is such that till the end of last week two key Pakistani ministers were camping in Beijing to discuss the request of a cash-strapped Islamabad for rescheduling the outstanding debts with China linked to the China Pakistan Economic Corridor.
A helpless Pakistan is now planning to appoint a local adviser in Beijing to address the re-profiling of Chinese credit to the power sector on a project-to-project basis, says a report in Arab News quoting the statement of the Finance Minister of Pakistan in a Press conference.
U.S. Assistant Secretary of State for South and Central Asia Donald Lu has observed that the days of Chinese investments in Pakistan are over as China has already invested a lot of money in Pakistan under the CPEC, the flagship project of its Belt and Road Initiative, and Beijing is worried that it is not going to get the money back.
Prime Minister of Pakistan Shehbaz Sharif visited China last June with three key expectations, say analysts. Firstly, he aimed to secure a rollover of Chinese loan repayments. The second was to negotiate new projects under the CPEC. The third was to assure the Chinese leadership of the safety and security of Chinese workers engaged in projects in Pakistan. This assurance had become necessary in view of an alarming increase in targeted attacks on Chinese engineers engaged in CPEC projects.
The joint statement between China and Pakistan issued after the visit was, however, a damp squib. It mentioned little beyond the signing of 23 agreements and MoUs in the areas of agriculture, industrial cooperation, infrastructure, market regulation survey and mapping, media and film. There was no mention of restructuring Pakistan’s mounting debt to China, nor any announcement about any substantial new investments under the CPEC.
In late July, however, a desperate Islamabad sent two senior Ministers to Beijing, Minister for Finance and Revenue Muhammad Aurangzeb and Minister for Energy (Power Division) Sardar Awais Ahmed Khan Laghari. Their task was to secure for a cash-strapped Islamabad the rescheduling of Pakistan’s outstanding debts linked to CPEC projects. The two hapless Ministers have met one authority and agency in China after another, including Governor of People’s Bank of China Pan Gongsheng and Deputy Secretary General of National Association of Financial Market Institutional Investors Cao Yuanyuan; but without success.
China has signalled their reluctance to discuss the issue and their disagreement with Pakistan over talks related to energy loans. There is no clarity if China has agreed to extend loans or reduce the interest rates. These concessions from China are essential for Islamabad to ease the balance of payments pressure of Pakistan, to lower energy costs and also to secure the approval of the International Monetary Fund for a $7 billion bailout package.
The American research institute AidData has calculated the cumulative public debt exposure of Pakistan to China at $67.2 billion for the period from 2000 to 2021. A significant portion of this, about $28.2 billion, was in the energy sector. Pakistani newspapers have quoted documents of the Power Ministry of Pakistan that the outstanding dues for CPEC power projects in June 2024 was 401 billion in Pakistani rupee, an increase of 122 billion in Pakistani rupee compared to the previous year.
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The two Pakistani Ministers have requested for an eight-year extension for repaying energy debt, converting U.S. dollar-based interest payment to payments in Chinese currency and the reduction in the overall interest rates for both CPEC and non-CPEC projects funded by China. Pakistan is stated to be aiming at rescheduling energy sector loans to the tune of $15 billion according to Pakistani banker S. S. Iqbal. The same banker has also pointed out that with the State Bank of Pakistan stopping in the financial year 2023-24 a profit outflow of $1.8 billion to Chinese investors it is also difficult for the mandarins in Beijing to maintain their cool.
Beijing now seems to be disappointed with the sluggish progress in the on-going CPEC projects. According to an Observer Research Foundation study, of the 21 proposed power projects only 14 have been completed, two are under construction and five are yet to start. Of the 24 proposed transport-related projects, roadways and railways, only six have been completed and there has been no progress in 13 of them. Only four of the nine proposed special economic zones have made any headway and none are fully operational. The unpaid debts, in violation of the CPEC Energy Framework Agreement of 2015, are also standing in the way of more financial aid and commercial relations between China and Pakistan, according to Pakistani newspapers which say Pakistan has breached the CPEC agreement by failing to make timely payments for power purchased from Chinese plants; making China Export and Credit Insurance Corp hesitant to fund new thermal and hydro-electric plants.
U.S. Assistant Secretary of State Donald Lu has also held China responsible for the failure of the CPEC projects to materialize, for the public resentment in Pakistan against Chinese projects and repeated attacks on Chinese workers and engineers engaged in projects in Pakistan. “I would argue the Chinese plan is to have a military base in every country and every infrastructure project is made with high interest Chinese loans and low paid Chinese workers. We just see this model all throughout the region,” he has been quoted to have told U.S. lawmakers during a Congressional hearing.
“The Chinese investors bring in their own workers. They don’t actually train local workers to do their enterprises. They extract minerals, literally take gold and copper from the ground and just ship it back for processing in China. They don’t spend any money in local communities. This is going to have a boomerang effect for Chinese businesses and their interests. They put a huge amount of money in Pakistan. I actually don’t see them putting a dime in there right now because they’re really worried about whether they’re going to get their money back there. This really terrible investment strategy is biting them in the ass,” Lu has said.
