Government Looks for Low-Cost Loans to Reduce Energy Debt
Pakistan is seeking up to $10 billion in cheaper foreign financing as unpaid dues to China-Pakistan Economic Corridor power projects have reached Rs423 billion.
The outstanding amount was recorded by the end of June. The dues remained unresolved because of disagreements over late payment surcharges and accumulated interest.
Government officials said Pakistan wants to secure new loans at an interest rate of around one percent. The financing would be used to repay expensive Chinese energy debt.
The government believes replacing costly loans with cheaper financing could reduce electricity prices. Under the revised proposal, power tariffs may decline by nearly three US cents per unit.
However, securing such a large amount at a one percent interest rate could be difficult. Pakistan has already struggled to obtain suitable financing from multilateral institutions.
Officials said the government is now considering bilateral creditors. Saudi Arabia is reportedly among the possible financing sources.
Pakistan may seek between $6 billion and $10 billion in Saudi loans. The amount could be used to settle debt linked to Chinese companies that established power plants under CPEC.
Power Minister Sardar Awais Laghari, however, said energy-sector loans were not on the official agenda of his scheduled Saudi Arabia visit. He said discussions would focus on energy reforms, transmission investment and grid digitisation.
Consumers Carry Heavy Power Debt Repayment Burden
The proposed financing plan would provide between $1.1 billion and $1.4 billion annually from 2027 to 2034.
Each loan instalment would carry a one percent interest rate. Repayments would begin after a three-year grace period and continue for 15 years.
The funds would be recorded in the financial accounts of the Central Power Purchase Agency-Guaranteed. The agency manages financial settlements between electricity producers and distribution companies.
The proposed loans would eventually be repaid through electricity tariffs charged to consumers.
According to the Power Division, debt servicing now accounts for more than one-third of Pakistan’s average electricity tariff.
The average tariff is around 11 US cents per unit, excluding taxes. Nearly four US cents per unit covers fixed debt-servicing obligations.
These costs have reduced the government’s ability to provide further electricity tariff relief.
Official documents show consumers must bear approximately $30.6 billion in power producer debt repayments over the next 13 years.
Consumers are also paying a debt service surcharge to recover nearly $5.7 billion in circular debt.
The circular debt developed because of weak bill recoveries, electricity theft, distribution losses and rising financing costs.
The government has proposed a clean energy integration financing facility. The plan may also include Sharia-compliant financing arrangements.
The facility would support grid stability, improve affordability and help achieve energy policy objectives.
Chinese Companies Resist Interest Write-Off Proposal
Chinese financial institutions and power producers have reportedly refused to write off nearly Rs170 billion in late payment interest.
The government wants the interest charges removed before paying more than Rs260 billion in principal energy purchase costs.
The disagreement has also prevented Pakistan from fully using a Rs1.25 trillion banking facility created to reduce circular debt.
The facility expired in June. The Power Division is preparing a summary seeking cabinet approval for a six-month extension.
The unpaid Rs423 billion is also inconsistent with the 2015 CPEC Energy Framework Agreement.
Under the agreement, Pakistan is required to clear payments to Chinese power producers regardless of recoveries from electricity consumers.
Pakistan was also required to establish a revolving fund covering 21 percent of power invoices.
A Pakistan Energy Revolving Account was opened at the State Bank of Pakistan in October 2022. It received annual allocations of Rs48 billion.
However, monthly withdrawals were limited to Rs4 billion. This restriction contributed to the continued accumulation of unpaid dues.
Official documents show that the Sahiwal coal power plant is owed Rs85 billion.
The Port Qasim power plant has outstanding dues of Rs76 billion, while the Hub power project is owed Rs64 billion.
The Thar Coal project has unpaid dues of Rs54 billion.
Engro Powergen Thar is owed Rs43 billion. The Matiari-Lahore Transmission Line has outstanding payments of Rs28 billion.
Karot Power Company is owed Rs17.5 billion, while Thar Energy Limited has unpaid dues of Rs11.5 billion.
The growing debt has increased pressure on Pakistan’s energy sector. It has also complicated efforts to lower electricity tariffs and restore investor confidence.
