Pakistan clears Rs100 billion Chinese energy debt

Pakistan has decided to clear over Rs100 billion in outstanding payments to Chinese power plants before Prime Minister Shehbaz Sharif’s scheduled visit to Beijing, in a move aimed at easing one of Beijing’s long-standing concerns over financial delays. This settlement will reduce Pakistan’s total dues to Chinese producers by nearly one-fourth.

Immediate Fund Release Ordered

According to government officials, the Ministry of Finance has instructed the release of funds from the power sector subsidies already allocated in the current fiscal year’s budget. The Rs100 billion disbursement is expected to be made within the next few days, with an additional Rs8 billion also allocated from the regular budget for Chinese producers.

Sources confirmed that Prime Minister Shehbaz Sharif has directed the Finance Ministry to ensure the Rs100 billion clearance by August 25.

Timing Linked to PM’s China Visit

The move comes ahead of the premier’s visit to China, where he will attend the Heads of State Meeting of the Shanghai Cooperation Organization (SCO) this weekend and participate in an investment conference organized by the Pakistan embassy.

As of June 2025, Pakistan’s outstanding dues to China-Pakistan Economic Corridor (CPEC) power projects stood at Rs423 billion. Following this settlement, the total outstanding amount will fall to just over Rs300 billion.

Rising Dues Despite Payments

Despite substantial payments made since 2017, dues have continued to accumulate. Pakistan has already paid Rs5.1 trillion in energy costs to 18 Chinese power plants, covering 92.3% of billed amounts, including interest. Authorities estimate that the actual remaining energy cost is less than Rs300 billion, with the remainder attributed to late payment surcharges.

Meanwhile, the government is negotiating nearly Rs1.3 trillion in fresh loans from local commercial banks to retire circular debt across state-owned, private, nuclear, and Chinese power producers. The deal, however, is yet to be finalized.

Breach of CPEC Energy Agreement

The 2015 CPEC Energy Framework Agreement requires Pakistan to clear dues in full, regardless of whether costs are recovered from end consumers. The existing Rs423 billion arrears are a violation of that framework.

In October 2022, the government established the Pakistan Energy Revolving Account at the State Bank of Pakistan with Rs48 billion annual allocations. However, withdrawals were limited to Rs4 billion per month, leading to a buildup of arrears. Of this year’s allocation, Rs8 billion has already been processed for July-August payments.

Distribution of Rs100 Billion

The Ministry of Energy confirmed that the Rs100 billion will be distributed based on billing, with the largest share going to coal-fired power plants:

• Sahiwal Power Plant (Imported Coal): Pakistan owed Rs87 billion; the plant has already received Rs1.14 trillion over eight years.
• Hub Power Project (Coal-Fired): Rs69 billion outstanding, against total claims of Rs834 billion.
• Port Qasim Power Plant (Coal-Fired): Rs85.5 billion pending, with cumulative bills exceeding Rs1 trillion.
• Thar Coal Project: Rs55.5 billion outstanding, against total claims of Rs566 billion.

Circular Debt Concerns

Pakistan’s energy sector circular debt (CD) was reportedly reduced by over Rs800 billion by June 2025. However, this reduction was largely due to budgetary injections rather than improvements in operational efficiency.

According to a recent report by the Federation of Pakistan Chambers of Commerce and Industry (FPCCI):

• The Rs801 billion stock payment was financed through fiscal measures, not sectoral reforms.
• These funds were originally earmarked as direct subsidies for consumers but were redirected to debt clearance.
• The apparent reduction in circular debt creates a misleading picture of reform success, masking the actual increase in liabilities.
• Excluding one-off adjustments, including Prior Year Adjustments (Rs358 billion), the circular debt has effectively risen by Rs379 billion.

Strategic Implications

The settlement of Rs100 billion dues signals Pakistan’s effort to reassure Beijing and uphold its commitments under CPEC. However, persistent issues in the power sector, mounting circular debt, and reliance on fiscal injections highlight the structural weaknesses that continue to strain the country’s energy and financial systems.