The ongoing economic challenges in Pakistan are causing concern among global investors, with even its close ally, China, now making demands that are prompting urgent consultations in Islamabad. Amidst growing fears of economic collapse and default, Chinese investors are urging Islamabad to transfer funds into offshore accounts to fulfill debts related to energy projects under the China-Pakistan Economic Corridor (CPEC).
In addition, Chinese investors are pressing for the clearance of $125 million in dividends owed to Chinese companies operating in Pakistan. These demands have sparked emergency discussions within the Pakistani government, as officials weigh their response carefully.
According to sources familiar with the situation, Pakistan has yet to accept these demands and is proceeding cautiously due to potential repercussions, including from the International Monetary Fund (IMF). Finance Minister Muhammad Aurangzeb has advised against hastily agreeing to Chinese demands, particularly given the sensitivities surrounding upcoming negotiations for a bailout program with the IMF.
The government asserts that Pakistan has never defaulted on its repayments for Chinese energy debts, which could be a key argument in its response to Chinese investors. Pakistan is expected to present its stance during the upcoming Joint Working Group on Energy meeting in Beijing.
Sources suggest that one reason for the Chinese demands is their difficulty in securing new loans amid Pakistan's financial turmoil. To reassure banks, investors are seeking to place funds in offshore accounts to demonstrate their financial stability.
Chinese investments in Pakistan's energy projects amount to approximately $21 billion, with Chinese debt for these projects standing at around $15 billion. These projects typically involve a 75% debt and 25% equity arrangement, resulting in annual payments of approximately $2.4 billion for debts and dividends.
However, its restricted foreign exchange ability of central bank, with $9 billion in hand, can hardly facilitate outflow of funds. Most of these reserves were attained through foreign loans and market interventions.
The Pakistani government does not want to take any steps which may offend the IMF visit. At the same time, it cannot afford to offend Chinese demands. The equation may be complex for the current administration.
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