The Ministry of Energy in Pakistan has appealed to the government for Rs48 billion to settle unpaid dues to energy projects associated with the China-Pakistan Economic Corridor (CPEC). Despite this request, the sum falls drastically short of the accumulated backlog, which has already soared to Rs487 billion.
According to sources familiar with the matter, the energy ministry’s plea for funds is embedded within its broader demand for subsidies for the fiscal year 2024-25. Of the total subsidies sought, amounting to Rs1.234 trillion, the allocation earmarked for CPEC projects represents only 4%.
Officials from the finance ministry have confirmed that annual allocations to address CPEC energy dues will be determined based on the energy ministry’s requisition. The allocated Rs48 billion per annum is subject to decisions made by the Economic Coordination Committee of the Cabinet and the federal cabinet.
The Pakistan Energy Revolving Account (PERA) was established by the government in December 2022, with an annual allocation matching the requested Rs48 billion.
Concerns from Chinese authorities regarding the delayed implementation of CPEC agreements have been reiterated. Recently, China has tied the provision of two new commercial loans, totaling $600 million, to prior arrangements for settling energy payments to their power plants.
Chinese investors involved in energy projects have encountered significant challenges in fulfilling dividend and debt obligations. Last year, the energy ministry’s demand for Rs100 billion in CPEC energy payments was met with an allocation of only Rs48 billion by the Ministry of Finance.
The accumulation of Chinese debt appears to contravene the 2015 Energy Framework Agreement, which obligates Pakistan to allocate sufficient funds in a dedicated fund to shield Chinese investors from circular debt. However, the government’s current annual allocation of Rs48 billion, with a monthly withdrawal limit of Rs4 billion, appears insufficient.
As of February’s conclusion, outstanding dues for power projects have surged to Rs487 billion or $1.8 billion, representing a 55% increase from the previous June.
Sources indicate that the interim government’s tenure witnessed a significant spike in CPEC circular debt due to delayed payments. For instance, in January, the caretaker government disbursed only Rs58 billion against invoices totaling Rs110 billion, leading to outstanding dues reaching Rs499 billion by January’s end.
During recent discussions with the International Monetary Fund (IMF), Pakistan assured that no additional budget would be allocated to settle outstanding dues in the current fiscal year.
To prevent further escalation of Chinese energy arrears, the government requires monthly budget allocations ranging from Rs10 billion to Rs15 billion. However, fiscal constraints have hindered these payments.
Despite escalating electricity prices, the power sector’s circular debt has surged to Rs2.7 trillion. Pakistan aims to cap the debt at Rs2.310 trillion by June 2024, with any excess requiring resolution through price adjustments or budget subsidies.
The Energy Ministry has also proposed Rs100 billion from the budget for the next fiscal year to retire circular debt under the dividend plough-back scheme.
The inadequacy of funds allocated for CPEC energy dues underscores the challenges facing Pakistan in meeting its financial commitments to Chinese investors within the energy sector. These developments have broader implications for the country’s fiscal stability and its commitments under the CPEC framework.
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