Pakistan refuses to pay Rs 220 billion in interest to China

Pakistan has refused to pay Rs220 billion in interest to China and has informed the International Monetary Fund (IMF) that it will not make this payment to Chinese energy producers under the China-Pakistan Economic Corridor (CPEC) project due to delayed payments. The government of Pakistan will formally seek a waiver from Beijing in this regard.

China understands that Pakistan is under severe financial pressure due to its current account deficit, particularly as a result of ongoing IMF programmes and currency depreciation. In the past, China has rescheduled or extended loans - for example, deferring SAFE deposit repayments.

CPEC is China's flagship project involving billions of dollars of investment. If Pakistan were to default on debt or interest payments:
- China's future investments could be reduced,
- ongoing projects could slow down,
- new projects could face delays.

China also lends to many other countries. If a close ally like Pakistan were to defer interest payments, criticism of China's so-called debt diplomacy could intensify. As a result, China could demand stricter conditions or guarantees in future agreements. If Pakistan unilaterally refused to pay the interest, this could damage its financial credibility. Other creditors might fear that Pakistan would not meet its obligations to them either.

If China continues to offer concessions, Pakistan's dependence on it would grow, which could allow Beijing to demand greater influence or control in decision-making processes. But if this issue is resolved by mutual agreement, it is unlikely to damage bilateral relations. Pakistan would gain temporary relief and China would retain diplomatic credibility.

According to sources, during the ongoing discussions with the IMF, Pakistan's Ministry of Power briefed the Fund on the financial and operational status of the power sector. The government has said it recognises only Rs250 billion in principal while it does not recognise Rs220 billion in interest, which is part of the Rs1.7 trillion carousel debt. However, China has recently urged Pakistan to create a special carousel account in line with the CPEC power project agreements to ensure timely payments.

During a recent meeting of the Joint Coordination Committee (JCC) between China and Pakistan, the two sides reached an agreement:
- Maintain stable tariffs in CPEC power projects,
- resolve disputes through mutual consultation,
- that neither party will take unilateral decisions.

A spokesman for the Energy Ministry declined to comment, saying that only the Finance Ministry was authorized to comment.

During the meeting, the IMF expressed concerns about:
- a decline in domestic demand for electricity,
- of the ever-growing carousel debt,
- the impact of the recent floods.

The power ministry has said that in the fiscal year 2025-26, the carousel debt could increase by another Rs 500 crore. To manage it, it expects a budgetary allocation of Rs 540 billion from the finance ministry.

Though the carousel debt rose by only Rs 45 billion in the previous fiscal - less than the expected Rs 340 billion - the situation may worsen again in the current fiscal. IMF sources said it appreciated Pakistan's efforts to improve the performance of the power sector and reduce the carousel debt from Rs2.42 trillion to Rs1.6 trillion, but was hesitant to call the improvement sustainable.

Meanwhile, the gas sector is facing its own Rs 2.6 trillion debt rollover and has not yet received any budgetary support. The government has indicated its intention to renegotiate the LNG deal with Qatar as LNG-based power plants are not taking gas, causing supply problems.

Pakistan's refusal to pay interest to China may cause temporary tension in relations. But the likelihood of a complete rupture is low because the two countries' relations go beyond economics - they also include defence, politics and strategic geography.

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