Islamabad: As Pakistan undertakes economic reforms under a new multibillion-dollar IMF bailout, Islamabad is urgently negotiating with Beijing to manage its substantial debt to China.

After securing a $7 billion bailout package from the International Monetary Fund (IMF) in July, Pakistan has initiated talks with China to reprofile billions of dollars in debt. The discussions aim to delay at least $16 billion in energy sector debt and extend a $4 billion cash loan facility due to the nation’s dwindling foreign exchange reserves.

High-Level Discussions in Beijing
Pakistani Finance Minister Muhammad Aurangzeb recently visited Beijing to present proposals for extending the maturity of debt for nine power plants constructed by Chinese companies under the Pakistan-China Economic Corridor (CPEC). Prime Minister Shehbaz Sharif also wrote to the Chinese government requesting debt reprofiling, a process that extends repayment deadlines without reducing the debt amount.

Energy Sector Challenges
CPEC, a major component of China’s Belt and Road Initiative (BRI), has seen Beijing invest billions in Pakistan’s infrastructure, including energy projects. However, these investments have contributed to Pakistan’s economic difficulties. The country’s power sector deals, largely with Chinese companies, involve capacity payments regardless of power production, burdening consumers with high costs.

"Rather than establishing government-owned power plants, Pakistan allowed Chinese companies to operate as Independent Power Producers (IPPs), leading to capacity payments regardless of production. This essentially leads to the population paying for power they aren't using," explained Azeem Khalid, an expert on Chinese investment in Pakistan.

Mounting Debt and High Interest Rates
As of 2022, Pakistan owed $26.6 billion to China, more than any other country. The interest rates on these loans, around 3.7%, are not concessional. Islamabad-based economist Safiya Aftab noted that the loans were intended for infrastructure projects that have not generated expected returns due to poor project management.

"These loans were given for infrastructure, which in theory is supposed to start generating returns. The main issue in my opinion is Pakistan's poor absorption capacity. The government was not able to progress on projects according to schedule," Aftab said.

The Impact of CPEC
Initially marketed as an affordable loan option, CPEC loans have proven more expensive and challenging to repay. Khalid criticized the agreements for favoring China and under-delivering on promises. Economist Kaiser Bengali added that restructuring debt is a temporary solution dependent on China’s willingness to accommodate Pakistan’s needs.

"Changing the payment structure on Chinese debt is only a temporary fix, which also depends on graciousness from the Chinese side, even if re-profiling and rollovers on loans from China have helped Pakistan fulfill its external financing needs several times in the past," Bengali remarked.

Strategic and Economic Implications
Pakistan’s debt problem is exacerbated by its strategic positioning between China and the US, with IMF loans under scrutiny to ensure they are not used to repay Chinese debt. While China’s support is influenced by its rivalry with India, slow project progress may test Beijing’s patience.

"The main reason for their generosity to Pakistan is their rivalry with India, and that's not going away anytime soon. But they may lose patience on slow project progress and start pressing for action," Aftab commented.

Official Stance and Future Outlook
Despite criticism, Pakistani and Chinese officials maintain that CPEC is a crucial opportunity for economic growth. Pakistan’s Ministry of Planning, Development, and Special Initiatives emphasized the favorable financing arrangements and China’s support during times of scarce foreign investment.

"CPEC has provided enormous opportunities for Pakistan to grow economically. It is an engine for economic growth," the ministry stated. However, Pakistan’s debt crisis remains unresolved, posing significant challenges to the nation’s financial stability and growth prospects.