Commentary on Political Economy

Tuesday, 9 February 2021

 

Pakistan to Seek Debt Relief From China Belt and Road Loan

  • China-financed power plants in Pakistan resulted in oversupply
  • Relief part of Pakistan’s plan to reduce power payments
How China’s Flagship Belt and Road Project Stalled Out
WATCH: So far, just one-third of the China-Pakistan Economic Corridor has been completed.

Pakistan plans to ask China for relief on payments for power projects Beijing financed over the past eight years, the latest developing nation that’s struggling to repay debt under President Xi Jinping’s Belt and Road Initiative.

In informal talks, Pakistan and China have discussed easing terms on the repayment of debt on about a dozen power plants, according to a person with knowledge of the matter, who said Islamabad hasn’t made a formal request yet. The parties have canvassed Beijing’s willingness to stagger debt payments, as opposed to lowering equity returns, the person said, requesting anonymity as the plan is private.

An enormous build-out of Chinese-financed power plants in Pakistan, which was originally intended to solve its electricity shortages, has resulted in a surplus that Islamabad isn’t able to afford. Infrastructure projects funded by China’s initiative in other developing nations, such as Sri Lanka and Malaysia, have suffered issues ranging from heavy debt loads to corruption.

China’s Ministry of Foreign Affairs and Ministry of Finance, as well as Pakistan’s power division, didn’t respond to requests seeking comment.

China has denied U.S. criticism that the initiative leads to debt traps, while acknowledging that countries have had difficulties repaying loans due to the pandemic-induced global recession. Last year, Beijing canceled interest-free loans to 15 African countries due to mature by the end of 2020, and it has delayed other payments.

The Belt and Road program had found new life in Pakistan last year with the signing of $11 billion worth of projects, most of which went to revamping the nation’s railway system.

While Chinese financing has helped Pakistan diversify fuel supplies, it has also resulted in a surplus of electricity, which is problematic for the government in Islamabad because it is the sole buyer and pays producers even when they don’t generate. To help tackle the issue, the government has negotiated with power plants, which produce roughly half of its electricity, to lower rates.

Pakistan will formally make the request to defer debt payments to China, as well as other plants that were part of the latest power policy, after it concludes deals with those local power producers to reduce electricity tariffs, said the person with knowledge of the matter. Debt relief from China will also help the government reduce power payments.

Daniel Moss

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