PAKISTAN’s efforts to secure energy sector debt relief from China’s banks and insurers do not seem to be getting anywhere. With the country’s energy and finance ministers in Beijing to formally request the authorities there for relief, one of the stipulations of the recently agreed $7bn IMF bailout programme, chances of a positive response from China do not, for the moment, appear rosy. Islamabad is reportedly looking for an eight-year extension in the repayment of energy debt, conversion of dollar-based interest payments to Chinese currency, and a reduction in overall interest rates for Chinese-funded projects. Chinese power companies have, however, already ruled out the possibility of agreeing to any changes in their power purchase contracts being demanded by Pakistan’s textile lobby and some political parties ostensibly to lower electricity tariffs. This uncertainty is said to be causing serious concerns in our financial sector since the outcome, either way, will have a significant impact on prospective CPEC and non-CPEC investment flows from China, which, along with Hong Kong, has been Pakistan’s largest direct foreign investor for years. Last year, it accounted for nearly half of the total foreign investment flows of $1.9bn. Outstanding dues of $1.8bn owed by the government to Chinese power companies are keeping others from bringing in investments.

People such as former State Bank deputy governor Murtaza Syed have opposed debt relief from China because Pakistan’s debt problem is not a Chinese debt trap and “cannot solve our debt problems on its own. China is only one part of the larger pie”. According to him, Pakistan needs debt relief from all its major creditors, including multilateral lenders, bond-holders, the Paris Club and China. With Pakistan facing severe debt stress, it is crucial that the external debt problem be analysed holistically. Beijing may want to know if Islamabad’s other international creditors are prepared to extend similar deals to the latter before it takes a decision on the debt relief request. That said, China has indeed been supporting Pakistan to stay solvent and avert a sovereign default in more ways than one for the last several years. While we keep our fingers crossed for a favourable outcome of the current debt relief effort, the question is: does the debt-stressed government have an alternative plan to cope with the situation in case the request is rejected?

Published in Dawn, July 28th, 2024