ISLAMABAD:

The energy ministry has requested Rs48 billion in funds from the government to clear the dues of energy projects of the China-Pakistan Economic Corridor (CPEC). However, this sum will not be sufficient to clear the backlog, which has already reached Rs487 billion.

The energy ministry made this request for funds as part of its demand for subsidies for the fiscal year 2024-25, according to sources. The ministry sought a total of Rs1.234 trillion in subsidies for the next fiscal year, but the amount requested for CPEC projects is only equal to 4% of the total subsidies.

An official from the finance ministry stated that annual allocations for clearing the CPEC energy dues will be made in accordance with the energy ministry’s demand. The Rs48 billion are allocated annually based on decisions made by the Economic Coordination Committee of the Cabinet and the federal cabinet.

The Pakistan Energy Revolving Account (PERA) was made operational by the government in December 2022, with an annual allocation of Rs48 billion.

Chinese authorities have repeatedly expressed concerns about the lack of implementation of CPEC agreements. Recently, China linked the provision of two new commercial loans, totalling $600 million, to prior plans for clearing energy payments to their power plants.

Chinese investors in the energy projects have faced serious problems in making dividend and debt payments. Last year, the energy ministry demanded Rs100 billion for CPEC energy payments, but the Ministry of Finance allocated only Rs48 billion for that fiscal year.

The accumulation of Chinese debt violates the 2015 Energy Framework Agreement, which binds Pakistan to allocate sufficient funds in a special fund to keep Chinese investors immune from circular debt. However, the government is allocating only Rs48 billion annually, with a condition to withdraw a maximum of Rs4 billion per month.

Read Phase 2 of CPEC accelerated with new economic corridors

As of the end of February, outstanding dues of power projects increased to Rs487 billion or $1.8 billion. This amount was Rs172 billion or 55% higher than the previous June.

Sources state that the major surge in CPEC circular debt occurred during the interim government period, which did not make payments on time. For instance, in January, the caretaker government made only Rs58 billion in payments to Chinese power plants, compared to the monthly invoices of Rs110 billion, pushing outstanding dues to Rs499 billion by the end of January.

In February, the government made Rs95 billion in payments against Rs101 billion in invoices, helping to lower the overall outstanding dues to Rs487 billion, said the sources.

Over the past 16 months, Chinese power plants billed Rs1.6 trillion for energy sales, but Pakistani authorities only cleared Rs1.3 trillion or 80% of the invoices. Pakistan is contractually obligated to make 100% payments to the Chinese plants to save them from the circular debt cycle.

During recent International Monetary Fund (IMF) review talks, the issue of payments to Chinese power plants was discussed. Pakistan assured the IMF that it did not plan to allocate additional budget to settle outstanding dues during the current fiscal year.

To maintain Chinese energy arrears at their current levels, the government needs at least Rs10 billion to Rs15 billion per month from the budget, but due to fiscal constraints, it remains unable to make these payments.

Sources suggest that Chinese authorities believe the PERA is not an alternative to the Revolving Fund Pakistan committed to opening when finalising CPEC deals. Pakistan was supposed to maintain a balance in the fund equal to 21% of monthly invoices.

Despite continued increases in electricity prices, the power sector circular debt has reached Rs2.7 trillion. Pakistan promised the IMF to keep the debt at Rs2.310 trillion by June 2024, with any increase above this threshold requiring settlement through price increases or budget subsidies.

Low bill recovery and high line losses contribute annually to Rs589 billion in circular debt build-up, an amount the government recovers through further price increases or budget subsidies.

The energy ministry has also sought Rs100 billion from the budget for the next fiscal year to retire circular debt under the dividend plough-back scheme.

Published in The Express Tribune, April 7th, 2024.

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