Pakistan Refuses to Pay Rs 220 Billion Interests to China

Pakistan has refused to pay Rs 220 billion in interest to China and has informed the International Monetary Fund (IMF) that it will not make this payment to the Chinese power producers under the China-Pakistan Economic Corridor (CPEC) due to delayed payments. The Government of Pakistan will formally seek a waiver from Beijing regarding this matter.
China understands that Pakistan is under immense financial pressure due to its current account deficit, especially as a result of ongoing IMF programs and currency devaluation. In the past, China has rescheduled or rolled over loans — such as postponing the repayment of SAFE deposits.
CPEC is China’s flagship project involving billions of dollars in investment. If Pakistan delays debt or interest payments:
• China’s future investments might reduce,
• Ongoing projects could slow down,
• New projects could face delays.
China also lends too many other countries. If a close ally like Pakistan delays interest payments, criticism of China’s debt diplomacy could intensify. As a result, China may demand stricter terms or guarantees in future agreements. If Pakistan unilaterally refuses to pay the interest; it could damage its financial credibility. Other creditors might fear that Pakistan could default on payments to them as well.
Moreover, if China keeps offering leniency, Pakistan’s dependence on China will grow, potentially allowing China to demand greater involvement or control in decision-making. However, if this issue is resolved through mutual agreement, it is unlikely to negatively impact bilateral relations. Pakistan would get temporary relief, and China would maintain its diplomatic credibility.
According to sources, during ongoing negotiations with the IMF, Pakistan’s Power Division briefed the Fund on the financial and operational state of the power sector.
The government clarified that it only acknowledges Rs 250 billion in principal dues, while it does not recognize the Rs 220 billion interest, which is part of the Rs 1.7 trillion circular debt. However, China has recently urged Pakistan to establish a dedicated circular account as per the CPEC energy project agreements to ensure timely payments.
During the recent Joint Cooperation Committee (JCC) meeting between China and Pakistan, both sides agreed:
• To maintain stable tariffs under CPEC energy projects,
• To resolve disputes through mutual consultation,
• That no party would take unilateral decisions.
A spokesperson from the Power Division declined to comment, stating that only the Finance Ministry is authorized to make statements on the matter.
During the negotiations, the IMF raised concerns about:
• The decline in domestic electricity demand,
• The continuous rise in circular debt,
• The impact of recent floods.
The Power Division revealed that in fiscal year 2025–26, an additional Rs 500 billion could be added to the circular debt. To manage this, the ministry expects Rs 540 billion in budgetary subsidies from the Finance Ministry.
Although the circular debt increased by only Rs 45 billion in the previous fiscal year — lower than the expected Rs 340 billion — the current fiscal year may again see deterioration.
Sources say the IMF appreciated Pakistan’s efforts to improve power sector performance and reduce the circular debt stock from Rs 2.42 trillion to Rs 1.6 trillion. However, it hesitated to call this improvement sustainable.
Meanwhile, the gas sector, with its own circular debt of Rs 2.6 trillion, has not yet received any budgetary support. The government has indicated its intention to renegotiate the Qatar LNG deal, as LNG-based power plants are not consuming gas, causing disruptions in supply.
Pakistan’s refusal to pay interest to China may cause temporary strain in their relations. However, the likelihood of a complete breakdown is low, as ties between the two countries go beyond economics — encompassing defense, politics, and strategic geography.