Islamabad: In a significant development ahead of Prime Minister Shehbaz Sharif’s scheduled visit to China, the government of Pakistan has decided to release Rs 100 billion to Chinese power plants operating under the China-Pakistan Economic Corridor (CPEC) framework. This move aims to reduce outstanding dues, improve financial relations with Chinese investors, and address Beijing’s growing concerns over delayed payments.
The payment, which will slash Chinese companies’ receivables by nearly one-quarter, reflects Islamabad’s attempt to rebuild trust with its largest foreign investor before key diplomatic and economic engagements in Beijing.
Background: Growing Liabilities of Chinese Power Plants
According to official sources, the total liabilities owed to Chinese power plants in Pakistan had reached Rs 423 billion by June 2024. These massive dues had become one of the biggest obstacles in smooth energy cooperation under CPEC, with Chinese companies repeatedly voicing dissatisfaction over payment delays.
While CPEC power projects have significantly reduced Pakistan’s electricity shortages over the past decade, they have also been affected by Pakistan’s persistent circular debt crisis. Circular debt arises when power distribution companies fail to recover full bills from consumers and, in turn, cannot pay power producers on time. This chain reaction has led to ballooning financial obligations that directly impact independent power producers, including Chinese firms.
Government’s Response Before Shehbaz Sharif’s Visit
The upcoming Shanghai Cooperation Organization (SCO) Summit in Beijing has added urgency to Islamabad’s actions. Prime Minister Shehbaz Sharif, who will not only participate in the SCO meeting but also attend an investment conference at the Pakistani Embassy, reportedly directed the Ministry of Finance to prioritize the payment to Chinese companies.
The Ministry of Finance has now approved the release of Rs 100 billion from subsidies allocated to the power sector. Officials confirmed that this amount will be disbursed among the Chinese power companies within the next few days. Additionally, Rs 8 billion had already been paid earlier in the fiscal year from funds earmarked specifically for Chinese projects.
Distribution of Funds Among Chinese Companies
According to Ministry of Energy officials, the payment of Rs 100 billion will be distributed proportionally based on the companies’ outstanding invoices. The bulk of the amount is expected to go to three major coal-fired power plants that account for the largest share of Chinese investment in Pakistan’s energy sector.
While this payment represents progress, officials acknowledged that the remaining Rs 323 billion in dues will still pose a challenge for Pakistan in the coming months.
The Role of the Pakistan Energy Revolving Account
Under the CPEC Energy Framework Agreement, Pakistan had agreed to establish a Pakistan Energy Revolving Account (PERA) to guarantee timely payments to Chinese power producers. The arrangement required Pakistan to deposit 21% of power purchase bills into this account to protect investors from circular debt.
In October 2022, the previous government finally set up PERA in the State Bank of Pakistan, allocating Rs 48 billion annually. However, the withdrawal ceiling was limited to just Rs 4 billion per month, a figure far below the actual payment requirements.
As a result, even though funds were technically allocated, only a small fraction could be utilized each month. This mismatch between allocation and disbursement aggravated the problem, pushing Chinese companies’ unpaid dues to Rs 423 billion by mid-2024.
Chinese Concerns and CPEC Slowdown
Chinese companies have repeatedly highlighted two major issues that slowed down CPEC’s momentum:
- Security Challenges – Attacks on Chinese nationals and projects in Pakistan, particularly in Balochistan, have raised serious concerns in Beijing.
- Delayed Payments – The massive accumulation of unpaid dues undermined investor confidence and discouraged new projects.
The non-fulfillment of financial agreements under CPEC has directly contributed to reduced investment activity. What began as a transformative $62 billion initiative between Pakistan and China has witnessed slower progress in recent years due to these structural problems.
IMF Conditions and Financial Pressures
Pakistan’s fragile economic situation has further complicated matters. Under the International Monetary Fund (IMF) program, Islamabad has had to cut subsidies, restructure its energy payments, and implement reforms in the power sector.
The IMF has also discouraged Pakistan from offering preferential treatment to specific investors, making it difficult for the government to prioritize Chinese companies despite their strategic importance.
However, the looming SCO summit and the Prime Minister’s personal engagement with Chinese leadership made this Rs 100 billion payment a political and diplomatic necessity.
Significance of the Upcoming SCO Summit
Prime Minister Shehbaz Sharif’s visit to China is not limited to multilateral diplomacy at the SCO. The visit carries strong economic dimensions, as Pakistan is keen on reviving CPEC and securing fresh Chinese investment at a time when the country faces high inflation, foreign exchange shortages, and energy sector bottlenecks.
The investment conference at the Pakistani Embassy in Beijing will serve as a platform to showcase new projects and opportunities. Islamabad hopes that the gesture of releasing Rs 100 billion to Chinese companies will strengthen its case and demonstrate goodwill.
Statements from Pakistani Officials
Officials from the Ministry of Energy have assured that this payment reflects the government’s commitment to resolving outstanding issues with Chinese investors. “The Rs 100 billion will be disbursed according to the verified bills of Chinese power companies. We are prioritizing this matter to restore trust and confidence in the partnership,” an official told the press.
Finance Ministry representatives added that the funds are being released from existing subsidies allocated to the power sector, which means no new burden will be created on the federal budget.
Broader Implications for Pakistan-China Relations
This payment is expected to serve multiple purposes:
- Restoring Investor Confidence: Showing Chinese companies that Pakistan takes their concerns seriously.
- Strengthening Bilateral Relations: Demonstrating commitment ahead of high-level talks in Beijing.
- Boosting Energy Security: Ensuring smooth operations of coal and other power plants, which provide a significant share of Pakistan’s electricity.
- Reviving CPEC Momentum: Creating a positive environment for new agreements and investment projects.
If successful, this step could pave the way for renewed Chinese participation in infrastructure, industrial, and digital projects under the second phase of CPEC.
Challenges That Remain
Despite this significant development, Pakistan continues to face multiple challenges in its energy and financial sectors:
- Circular Debt Crisis – Pakistan’s overall circular debt in the energy sector exceeds Rs 2.3 trillion, making it one of the most pressing economic challenges.
- Dependence on Imported Fuel – Heavy reliance on coal, LNG, and oil imports exposes Pakistan to global price shocks.
- Weak Revenue Collection – Power distribution companies still struggle to recover full bills, leading to persistent shortfalls.
- IMF Restrictions – Future payments may remain constrained by IMF conditions and fiscal limitations.
Unless these structural issues are resolved, one-time payments like the Rs 100 billion disbursement may provide temporary relief but not a lasting solution.
Conclusion
The decision to release Rs 100 billion to Chinese power plants ahead of Prime Minister Shehbaz Sharif’s visit to Beijing is a clear indication of Pakistan’s intent to address Chinese concerns and reset bilateral energy cooperation. While the payment will reduce outstanding dues by nearly 25%, long-term challenges such as circular debt, IMF restrictions, and security concerns still threaten the stability of the partnership.
Nevertheless, this move is likely to create a more positive atmosphere during the SCO summit and investment conference, potentially paving the way for new agreements under the China-Pakistan Economic Corridor. For Pakistan, ensuring the confidence of Chinese investors remains critical to securing future energy security and economic growth.
