Pakistan to seek $2.7 billion loan from China for CPEC construction project

Pakistan has decided to seek USD 2.7 billion loan from China for the construction of package-I of the Mainline-1 project of China Pakistan Economic Corridor (CPEC).

Citing government officials, The Express Tribune has reported that the sixth meeting of the financing committee on ML-1 project, which includes dualisation and upgrading of the 1,872 km railway track from Peshawar to Karachi, decided that Pakistan would initially request China to sanction only USD 2.73 billion in loan out of the total estimated Chinese financing of about USD 6.1 billion.

This development comes even as Pakistan's economy has been teetering on the verge of bankruptcy for some time and the COVID-19 pandemic has made the situation even worse.

The Ministry of Economic Affairs has been directed to formally send the Letter of Intent to China next week as Beijing is expected to finalise its next year's financing plans by the end of the current month, The Express Tribune reported.

"In April this year, Pakistan had shared a term sheet for Chinese loan, seeking 1 per cent interest rate. But China has not yet formally responded to the request. They said that informally Chinese authorities conveyed that the interest rate could be higher than the one mentioned in the term sheet," the sources told the Pakistan daily.

In May Pakistan's former ambassador to the United States Husain Haqqani wrote in an article in The Diplomat that Pakistan's desire to maintain strategic relations with China has resulted in the construction of USD 62 billion worth of CPEC, which includes a set of infrastructure projects, being mired in insufficient transparency.

"China's consistent strategic support, including help with Pakistan's nuclear program, is often held out by Pakistan's military establishment favorably in contrast with the more conditional Pakistani alliance with the United States. But it seems now that China is not in Pakistan to help its people but rather as a predatory economic actor", he said.

The 278-page report by the "Committee for Power Sector Audit, Circular Debt Reservation, and Future RoadMap" listed malpractices to the tune of 100 billion Pakistani rupees (USD625 million) in the independent power generating sector, with at least a third of it relating to Chinese projects.

According to the committee's report, "excess set-up costs of (Pakistani Rupee) Rs 32.46 billion (approximately USD204 million) was allowed to the two coal-based [Chinese] plants due to misrepresentation by sponsors regarding [deductions for] the 'Interest During Construction' (IDC) as well as non-consideration of earlier completion of plants."

The interest deduction was apparently allowed for 48 months whereas the plants were actually completed within 27-29 months leading to the entitlement of an excess Return on Equity (RoE) of USD27.4 million annually over the entire project life of 30 years in the case of the Sahiwal plant.