Pakistan is grappling with a severe energy crisis and financial challenges, with the country’s power sector circular debt reaching 1.89 trillion rupees ($6.7 billion) as of February, a significant increase in just two months. A substantial portion of this debt, amounting to 543 billion rupees, is directly associated with projects under the China-Pakistan Economic Corridor (CPEC). The International Monetary Fund (IMF) has expressed concerns over Islamabad’s payments to Chinese power producers, highlighting the debt’s threat to economic stability.
The circular debt mechanism, which obligates Pakistan to pay for Chinese-built capacity regardless of usage, is draining the national coffers and exacerbating the financial strain. Prior to the operation of CPEC power plants, annual power capacity charges stood at 384 billion rupees, but have surged to 2.1 trillion rupees due to contractual obligations with Chinese independent power producers. This arrangement forces Pakistan to make payments irrespective of actual electricity consumption, leading to financial burdens on the country.
The reliance on coal-fired power plants, including flagship facilities at Sahiwal, Port Qasim, and Hub that import coal from various countries, exposes Pakistan to fluctuations in global coal prices. Consequently, electricity tariffs in Pakistan fluctuate, impacting industries and consumers. The article notes that when coal prices rise, industries facing higher operational costs may halt production, while consumers struggling with increased bills may default on payments, contributing to a growing debt burden.
Efforts to address the financial strain include negotiations with Beijing to resolve overdue payments to Chinese power producers. Despite Pakistan’s attempts to alleviate the situation by raising funds and seeking waivers on late-payment charges, Chinese independent power producers have been reluctant to agree to concessions. The impasse highlights the challenges faced by Islamabad in managing its financial obligations amidst competing pressures from creditors.
