Pakistan stuck in Chinese debt trap over power loans

By a Correspondent

Pakistan is struggling to repay Chinese loans given under the Belt and Road initiative, and will soon seek to reschedule almost 22 billion dollars in outstanding power sector credits. It can easily be said that Pakistan has bitten off more than it can chew.

Recently, Chinese loans have empowered an increasing build out of Pakistan's power generation, turning its consistent electricity shortage into a massive capacity surplus that cannot be afforded by it. Science till now has not been able to invent a device to store electricity. It is only produced as long as there is potential difference, a term in physics. This potential difference has to be there always to produce electricity. You have electricity only till power generators are on. Even if it is surplus, it is wasted.

The China-Pakistan Economic Corridor is worth at least 60 billion US dollars. About half of this has been spent in developing wind, coal, solar and thermal power plants. According to top level sources, the two sides are now mired in top level talks on power-sector debt payment rescheduling. Pakistan's side is also pleading to decelerate agreed plans to build more power plants that would add to the current overcapacity problem. What is the need of new power plants when you already have surplus power.

A high level group led by Pakistani President Arif Alvi visited China in the previous March to get the interest rate on power sector related loans lowered. According to the same sources, Alvi also discussed with his Chinese counterpart a 10 year extension in the debt repayment period.

Alvi's grovelling, although, has not made much headway. The Chinese have still not budged on the terms of the power loan deals. Pakistan's government has again approached its Chinese counterpart but no information has leaked out into the public domain about their exchanges. This is actually highly routine, China always prefers to deal with sensitive situations like these behind the scenes. In fact, China’s intention is not to help Pakistan in generating power. It just wants that a time comes when Pakistan surrenders before it and it takes its pound of flesh.

Actually China has fully trapped Pakistan in its net. The previous government had entered into contracts with Chinese companies that favour China one sided! The power purchase rates are not just fixed, they are quite high too. This year, the Pakistani government is obliged to make 3.75 billion US dollars worth of capacity payments to Chinese-financed power producers. It is extremely important to note that Pakistan has to pay for full capacity output, even if it does not use it. Pakistan is now stuck with a massive idle capacity problem. In fact, it has more power plants coming up along with guaranteed power purchase agreements.

This is part of China’s trick. It greases the palm of a particular government and ends up with one sided contract. Even if the government goes, the new government has to honour the contract as everything is in black and white.

Pakistan's total power generation capacity is 37,402 MW in 2020. This is much higher than its demand of 25,000 MW in summers and 15,000 MW in winter. More importantly, Pakistan's transmission and distribution capacity is only 22,000 MW. Hence, 15,000 MW of power remains unused in summer and 22,000 MW in winters. Pakistan, unfortunately, still has to pay for this overproduction as payment is made on installed capacity and not used capacity.

Hence, Pakistan is now burdened under its power debt. Experts suggest that if the current overcapacity problem and debt repayments terms persist, the government's overall power sector liabilities will increase to 9.4 billion dollars by the end of 2023.

These obligations are exerting a huge pressure on Pakistan's national debt. Many analysts are predicting Pakistan’s total debt servicing liability could surpass $14 billion by the end of the year, at a time foreign exchange reserves are hovering around $13 billion. Very soon Pakistan will have debt from China just in one sector which will surpass its foreign reserve. Likewise, there are many projects besides basic food, clothing and shelter for its inhabitants.