Pakistan economy to face severe crisis over Chinese loans

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Pakistan economy to face severe crisis over Chinese loans

ISLAMABAD: Pakistan might go through another financial crisis as the government has taken loans for eight energy projects on huge interest rate and awarded these contracts on hefty profit.

Sources said the loans were taken on "extremely hard conditions" and contracts were given to Chinese firms on almost 20 percent return profit.

They added that the repayment of these loans would commence soon after which Pakistan would have to pay the original amount and heavy markup to the Chinese companies and this would bring the country's foreign reserves under immense pressure.

The Water and Power Ministry shared financing details of the projects with the National Assembly's Standing Committee on Planning and Development. This is the first time that such financing details have been made public.

The projects are Engro Powergen Thar Coal-II, Port Qasim Power Plant, Thar Coal Power Plant, Hubco Coal Power, Thar Energy Limited, Sahiwal Coal Power, Suki Kinari Hydro and Karot Hydro. The projects, having a collective capacity of 7,680MW, will cost $12.5 billion. Of the $12.5 billion roughly $9.5 billion will be debt and the remaining will be contributed as equity by the sponsors.

The Water and Power Ministry disclosed, "$9.5 billion debt shall carry an interest rate of London Interbank Offered Rate plus 4.5 percent."

"In effect, the Chinese loan shall bear an interest rate of 6.21 percent (as the current one-year LIBOR hovers around 1.71 percent). Additionally - and amazingly - the Beijing-based China Export & Credit Insurance Corporation will charge an insurance premium of 7 percent (even though the Government of Pakistan has guaranteed to purchase each and every unit of electricity that will be generated)."

The ministry also said, "The return on equity in the Sahiwal Coal Power Project "shall be 27.2 percent" and the return on equity in the 1,320MW Thar Coal Power - by Shanghai Electric Power - stands at 34.49 percent. For the record, these dollar-denominated, Government of Pakistan-guaranteed rates must be among the highest on the face of the planet-and an investor's dream come true."

"The annual financing burden for these eight projects will be around $2 billion, plus an insurance premium of $650 million. And assuming that the entire amount of $35 billion is utilised for energy projects the annual financing burden shall go up to $5.3 billion plus an insurance premium of $2 billion (Budget 2016-17 allocated a total amount of $1.1 billion as 'mark-up on foreign debt')."

By: Abbas Shahid