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Pakistan considering the possibility of requesting a 5-year extension for $15.36 billion debt related to Chinese IPPs

ISLAMABAD: With an International Monetary Fund team arriving to assess Islamabad’s ability to manage its increasing debt burden, Pakistan is exploring options to secure a five-year extension for the outstanding debt of $15.36 billion owed to Chinese Independent Power Producers.

Obtaining approval from both the Chinese government and the IPPs operating in Pakistan is crucial to amend the existing contracts, a process that may entail extensive negotiations to achieve the desired outcome.

Senior officials confirmed to The News on Thursday that if the government formally requests China for an extension, negotiations would likely be protracted. One proposed option is to decrease the tariff for consumers by Rs1.1 from 2024 to 2029 and by Rs0.9 from 2030 to 2040. Consequently, the average tariff would decrease by Rs0.18 kWh from 2024 to 2040, with the debt’s tenor extended for five years from 2036 to 2041.

According to calculations by relevant ministries currently under high-level consideration for submission to China, extending the tenor of the Chinese IPPs debt would elevate the outstanding liability from $15.36 billion to $16.61 billion over five years, representing a $1.3 billion increase. In terms of rupees, the cost of the IPP debt would rise by Rs377 billion over the same period.

Pakistani authorities advocate extending the debt tenor for Chinese Independent Power Producers (IPPs) to alleviate the upfront financial strain on consumers caused by concentrated debt service repayments. Currently, 21 IPP projects are ongoing under the China–Pakistan Economic Corridor, with a total outstanding debt of $15.36 billion. Negotiating an extension would require intense discussions at the Government-to-Government level and with Chinese IPPs, potentially boosting cash flow, reducing consumer burden, and stimulating economic growth. However, financing costs could rise by $1.257 billion due to prolonged negotiations and contract alterations.

The breakdown of outstanding liabilities from Chinese Independent Power Producers (IPPs) reveals the following figures for the financial year 2023-24:

  • Sahiwal Coal project: $740 million with an interest spread of 4.5%
  • Port Qasim coal project: $872 million with an interest spread of 3.5%
  • China Power Hub coal project: $965 million with an interest spread of 4.08%
  • Engro Power Thar: $491 million with interest spreads of 4.32% and 3.5%
  • Thar Energy Coal: $350 million with an interest spread of 4.5%
  • Thal Nova Coal: $362 million with an interest spread of 4.5%
  • TCB-1 Coal project: $1.369 billion with an interest spread of 4.5%
  • Gwadar Coal: $287 million with an interest spread of 4%
  • Karot Hydro: $1.255 billion
  • Sukki Kinari hydro project: $1.28 billion with an interest of 4.5%
  • Azad Patan hydro: $1.01 billion
  • Kohala Power: $2.07 billion
  • Pak Matiari-Lahore Transmission Company Transmission Line: $1.15 billion.

Eight wind power projects each have outstanding liabilities ranging from $40 to $88 million.

The IMF has requested Pakistan to disclose its outstanding liabilities related to pensions, state-owned enterprises, and subsidies over the next five years, as significant liabilities were previously undisclosed. This lack of transparency makes it difficult for the IMF to accurately assess the government’s total debt and liabilities.

Regarding power tariffs, discussions between the National Electric Power Regulatory Authority and the IMF team became contentious while determining the baseline tariff. Formal negotiations for a new bailout package require the consent of the visiting IMF team, as negotiations have not yet progressed to formal talks.

If the baseline tariff is raised by Rs5 to 7 per unit, the average tariff, currently at Rs29 per unit, would increase to Rs35 or 36 per unit. Additionally, gas tariffs are expected to rise by an average of over 60% starting from July 2024.

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