ISLAMABAD:

Pakistan has decided to settle over Rs100 billion in dues owed to Chinese power plants ahead of Prime Minister Shehbaz Sharif’s upcoming visit to Beijing, reducing the country’s outstanding obligations to Chinese producers by nearly one-fourth. This move aims to address one of Beijing’s major concerns.

The Ministry of Finance has issued instructions to release the funds from the power sector subsidies earmarked in this fiscal year’s budget, according to government officials. They said that it is expected the Rs100 billion will be disbursed to the Chinese power producers within a couple of days.

In addition to the Rs100 billion, Rs8 billion is also allocated from the regular budget for the Chinese power producers.

The development comes days before PM Shehbaz’s visit to China, where he is set to attend the Heads of State meeting of the Shanghai Cooperation Organization (SCO) this weekend. The premier is also expected to participate in an investment conference organised by the Pakistan embassy.

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Sources said that the PM had instructed the Finance Ministry to clear the Rs100 billion payments to the Chinese Independent Power Producers by August 25.

As of June this year, the outstanding dues for China-Pakistan Economic Corridor (CPEC) power projects amounted to Rs423 billion. After this payment, the Chinese dues will be reduced by one-fourth, bringing the total to just over Rs300 billion.

There was a slow increase in Chinese outstanding dues last fiscal year, but the dues were still accumulating.

Since 2017, the country has already paid Rs5.1 trillion in energy costs to 18 Chinese power plants, which accounted for 92.3% of the billed amount, including interest. Pakistani authorities believe the actual remaining energy cost is less than Rs300 billion, with the rest attributed to late payment surcharges.

The government is in the process of taking nearly Rs1.3 trillion in fresh loans from local commercial banks to retire the circular debt owed to state-owned power plants, nuclear power plants, privately owned plants, and Chinese plants. However, the deal has not yet been formally concluded.

The Rs423 billion unpaid debts violate the 2015 CPEC Energy Framework Agreement, which mandates the government to fully clear the dues, regardless of whether authorities can recover the amounts from end consumers.

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Along with security concerns, non-fulfillment of CPEC contracts is one of the reasons for slow progress in financial and commercial relations between the two nations.

Under the CPEC Energy Framework Agreement, Pakistan was required to create a revolving fund with 21% of the power invoices to protect Chinese firms from the circular debt crisis.

However, the previous government opened a Pakistan Energy Revolving Account at the State Bank of Pakistan in October 2022, with Rs48 billion in annual allocations. But it limited withdrawals to Rs4 billion per month, leading to the current Rs423 billion debt stock.

Out of the Rs48 billion allocations for this fiscal year, the government has processed Rs8 billion in payments for the July-August period, sources said.

The Rs100 billion will be distributed among the Chinese power producers according to their billing, according to Ministry of Energy officials. They said the majority of this amount will go to the three largest coal-fired power plants.

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Pakistan owed Rs87 billion to the imported coal-fired Sahiwal power plant, which has received Rs1.14 trillion in the past eight years of its operations. The country also owed Rs69 billion to the coal-fired Hub power project, compared to the total claims of Rs834 billion.

The outstanding remaining dues of the coal-fired Port Qasim power plant were Rs85.5 billion, against total bills of over Rs1 trillion. The Thar Coal project dues stood at Rs55.5 billion, with total claims amounting to Rs566 billion.

The government’s energy sector circular debt reduced by over Rs800 billion by June this year, thanks to budgetary injections rather than any real improvement in sector performance.

The reported reduction in Circular Debt (CD) for FY 2024-25 is primarily attributed to a one-time stock payment of Rs801 billion, rather than any sustained operational efficiency gains, according to a report by the Federation of Pakistan Chamber of Commerce and Industry (FPCCI) last week.

The report added that this settlement was financed through fiscal measures, not performance improvements in the power sector.

The FPCCI report also stated that the Rs801 billion was originally earmarked as a direct subsidy for consumers. However, it was instead utilised to reduce the circular debt stock, potentially distorting public perception by overstating the success of reforms and underrepresenting the benefit that consumers should have received.

While the headline suggests a net reduction in circular debt, the inclusion of one-off adjustments—such as Prior Year Adjustments totaling Rs358 billion—masks the actual trajectory, the report concluded.

Excluding the Rs801 billion stock payment and the temporary relief from these adjustments, the circular debt has, in fact, increased by approximately Rs379 billion, it added.