Muhammad Imtiaz became alarmed last summer when he received an electricity bill totalling more than $120. He earned only the bill for June and July from ferrying people on his motorbike in the gritty suburbs outside of Islamabad, the capital of Pakistan.

He lives with his wife and four kids in a two-room house with just lights and a refrigerator. In the summer, when temperatures can rise above 110 degrees Fahrenheit, he operates two fans.

“Should I give my rent, pay the electricity bill, or buy food for my children?” said Imtiaz, who has racked up $3,000 in debt. His family has one meal a day: watered-down lentils with flatbread.

Due to a severe power shortage ten years ago, Pakistan looked to Beijing to construct over a dozen coal, solar, and hydroelectric power plants as part of China's massive infrastructure drive in the nation.

Pakistan now has adequate energy and more because to a number of policy errors made by Islamabad, but few can afford it because of the enormous debt owed to China.

The crisis is overwhelming Pakistan’s fragile economy, throwing millions of households into misery, shredding government finances and shutting down industry.

The growing emergency is straining Pakistan’s relationship with China—one of its closest allies, with deep military ties and a common rival in India.

Pakistan exemplifies China’s strategy of engaging developing nations to counter U.S. influence, despite the U.S. being a long-term ally of Islamabad. However, Pakistan's ongoing power crisis highlights how Chinese funding can overwhelm struggling economies.

A decade ago, Pakistan became a key participant in China’s Belt and Road Initiative (BRI), aimed at strengthening trade ties through infrastructure projects. As part of this, Pakistan signed $25 billion worth of agreements with China, including power plants, roads, and a major port, intended to create a trade corridor and boost Pakistan’s economy.

Under these agreements, Pakistan guaranteed Chinese state companies annual dollar returns of up to 34%, paying for the installed power capacity whether it was used or not.

Pakistan’s energy issues predate China’s involvement. In the 1990s, a World Bank initiative encouraged private sector participation, shifting the focus from hydroelectric power to faster-built fossil fuel plants, raising costs. However, Pakistan's decision to rapidly construct numerous Chinese-built power plants significantly escalated its financial burdens and debt repayments.

Under the deal, China built and financed the plants, but Pakistan pledged to repay the cost—along with a rich premium on top—by buying the electricity produced by them for as long as 40 years. Worse still, Pakistan promised to repay the cost over just 10 years, meaning it had to charge sky-high prices for the electricity.

The deal was also financed in dollars. Soon after the Chinese plants started coming on stream in late 2017, Pakistan’s currency devalued by about half, sending the dollar-denominated debt soaring.

Pakistan commissioned the Chinese power plants in 2015, yet it didn’t carry out an assessment of electricity demand until 2021. There was no competitive bidding to secure the lowest price for the power stations.

“The bad planning all added up,” said Awais Leghari, Pakistan’s energy minister. “The financial impact has almost made us go into a tailspin situation…We’re still trying to stabilize the situation.”

Ahsan Iqbal, the planning minister, who served in the same position when the power stations were commissioned, said that only China was willing to invest at the time, given the risk associated with Pakistan. He said that Islamabad assumed Pakistan would grow at 6%. Instead, the economy contracted last year, before growing at 2.4% this year, according to the International Monetary Fund.

“There was a new regime, and the economy collapsed,” said Iqbal.

At present, demand is only around 40% of the annual generation capacity, said Leghari, the energy minister. But Pakistan must pay for the full capacity, whether or not it is used. And that capacity is due to increase by another third in the next decade, as yet more power plants come online.

Those deals mean that in Pakistan, some of the world’s poorest people are being billed more than what households in far richer countries pay for the same amount of electricity.

Consuming 320 kilowatt-hours of electricity in a month in the eastern city of Lahore—enough to power a couple of fans, a handful of lights and a small fridge—costs a household $60, even at the discounted rate charged to low-volume consumers. Pakistan’s per capita income is $125 a month.

The unaffordable price of power is dramatically reducing demand, as a wave of homes and businesses turn to rooftop solar panels, rein in consumption, or just steal the power, pushing prices higher still for remaining paying consumers. In August, electricity demand was down 17% compared with the same month last year.

“We’ve never seen a utility death spiral before,” said Jenny Chase, a solar analyst at BloombergNEF, which researches renewable energy.

Pakistan is in arrears to Chinese companies with more than $1 billion worth of unpaid power bills, as well as some $15 billion in debt for the building of the Belt and Road power plants, with a further $9 billion for two Chinese-built nuclear plants. According to a tally by researchers at William & Mary, Pakistan has received $70 billion financing from China since 2000, making it the third biggest recipient.

Islamabad is now urgently seeking to renegotiate the terms of long-term contracts it drew up with both private domestic operators and the Chinese power plants. The aim is to cut bills by up to a fifth.

But providing debt relief in Pakistan could lead other nations that owe Beijing to seek similar concessions.

China’s Foreign Ministry said that its power infrastructure in Pakistan “adheres to the principle of extensive consultation, joint contribution and shared benefits, and follows market laws and business rules.”

With Pakistan dependent on bailouts from the IMF, Islamabad finds itself caught between the U.S., which wants to ensure that the Washington-based lender’s loans aren’t being used to pay off Beijing, and China, which fears that the global financial architecture is being turned against it. The most recent IMF bailouts have required hefty increases in electricity rates, leading tariffs to triple or even quadruple for many users compared with six years ago.

Islamabad has proposed a three-year moratorium on debt payments to China, followed by a five-year extension to loans’ maturity. Pakistan is also asking China to convert two big power plants it built from running on imported coal to the lower-quality and cheaper domestic coal. China hasn’t responded publicly to the proposals.

Pakistani officials say the talks have been delayed by continued attacks on Chinese personnel in the country. Islamic jihadists and separatists in Pakistan have attacked Chinese workers whom they see as closely allied to the Islamabad government.

Five Chinese construction workers at a hydropower project were killed in a bombing in March, and a suicide bombing killed two Chinese men employed at a power plant in Karachi in October. Beijing is now pushing to have its own security personnel on the ground in Pakistan.

In unusual language for a Chinese diplomat speaking about an ally, Jiang Zaidong, the ambassador in Islamabad, in October called the attacks “unacceptable.”

“Without a safe and sound environment, nothing can be achieved,” Jiang said.

Source: The Wall Street Journal