(Bloomberg) -- Pakistan is getting a promising response from China over its request to lengthen maturities for Belt and Road Initiative loans, according to its finance minister, signaling potentially more breathing room for the nation that has been squeezed by costly borrowing in the past.
The South Asian nation is looking to increase the maturities for debt taken to build power plants and “create enough space” to lower electricity prices, Muhammad Aurangzeb said in an interview in Washington. Electricity prices have tripled for some people in Pakistan in the past few years and surpassed house rent for some.
“We have just started that discussion and the response is encouraging,” Aurangzeb said Tuesday on the sidelines of the annual meetings of the International Monetary Fund and World Bank. “These are early days in terms of those negotiations. The former JPMorgan Chase & Co. banker discussed debt with Chinese officials during a visit to the country in July.
Pakistan is seeing a period of stability after securing a new $7 billion loan program from the IMF. It has also seen partners including China roll over debt of $16 billion from a total of about $26 billion due in the current fiscal year that started in July. The government also plans to initiate discussions on obtaining additional financing from the IMF through its climate resiliency fund, he said.
The Chinese side is willing to continue to carry out energy cooperation with the Pakistani side in a pragmatic, steady and orderly manner so as to better benefit the people of the two countries, the Spokesperson’s Office of China’s Foreign Ministry said in a reply. Energy cooperation between the two countries comes with extensive consultation, joint contribution and follows market rules, it said.
“We also call on all relevant parties to take positive actions and jointly play a constructive role in Pakistan’s sustainable economic development,” the ministry said.
Having gone through 25 loan programs over half a century, Pakistan must institute durable reforms in key areas of the energy sector, tax collection and state-owned enterprises to end a cycle of indebtedness, the finance minister said separately at an IMF forum later on Tuesday.
“We’ve had so many programs. We’ve had boom and bust cycles,” Aurangzeb said. “We do not have a choice but to ensure that we continue with the structural reforms.”
He added that the government knows it has no business being in business and that it must provide an enabling environment to support the private sector. It also aims to shrink government costs by cutting the number of ministries and closing 150,000 federal positions.
To boost tax revenue, Pakistan will target sectors including retail and agriculture that have opposed previous attempts at taxation. The nation’s provinces will move forward on legislation on the agriculture side by January and aim to start collection by July, the finance chief said in the interview with Bloomberg.
The country has been a flagship destination for China’s Belt and Road Initiative of lending to developing countries that helped the nation end its decades-long electricity blackout issues. Now its seeking to extend the maturity of debt for nine power plants built by Chinese companies under the multi billion-dollar economic corridor.
Pakistan’s period of stability has seen consumer price increases decelerate to the lowest in almost four years. Pakistan’s short-term local government bonds are set for their first annual inflow from foreign investors in five years, buoyed by high yields and a stable rupee. The benchmark stock index has risen 70% in the past 12 months, making it the world’s best performer.
Pakistan’s central bank has cut its benchmark interest rate for three consecutive meetings by 450 basis points to 17.5% from a record 22%. The next meeting on Nov. 4 may see the central bank reduce the policy rate, said Aurangzeb.
--With assistance from Clarissa Batino and Colum Murphy.
(Updates with China’s foreign office comments in fifth and sixth paragraphs.)
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