Pakistani officials oppose proposed interest rate hike for 969-MW Neelum Jhelum hydropower plant

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Pakistani Prime Minister Nawaz Sharif and his cabinet have refused Chinese demands for higher interest rates on a US$576 million loan extended to Pakistan for the 969-MW Neelum Jhelum hydropower project.

Sources in Pakistan report that the loan had been requested by Pakistan from the Export-Import Bank of China, and that terms of the deal were being negotiated through Pakistan's Economic Affairs Division.

An earlier Exim Bank loan made in 2013 for the Neelum Jhelum project carried an interest rate of 4.4%, though the lender said it would increase the rate to 7% for the $576 million loan.

The higher rate was accepted by officials from Pakistan's Water and Power Development Authority (WAPDA), who said the percentage was still lower than what would be paid on cash development loans.

Sharif and his cabinet, however, argued that high-interest borrowing from foreign sources might have negative impacts on Pakistan's foreign currency reserves.

Pakistan is currently pursuing a new loan at the interest rate already being charged.

The news comes days after a block of lenders from the Middle East -- including the Islamic Development Bank, Kuwait Fund for Development, Saudi Fund for Development and Opec Development Fund -- pulled $433 million in collective loans earlier this month after it was revealed the cost of the project had skyrocketed from an anticipated $1.8 billion to now more than $4.2 billion.

The lenders had pledged a reported $692 million -- $260 of which has already been disbursed -- though the remainder was halted with demands for performance guarantees preventing further price increases.

The project has sparked controversy throughout its development as the 330-MW Kishanganga hydroelectric plant -- being developed by India's National Hydroelectric Power Corporation (NHPC) -- would use from the same river.

WAPDA has made the completion of Neelum Jhelum a priority as international courts have said the country that completes its hydropower project first will have priority rights to the Neelum River's waters.

The plant was originally scheduled to begin generating power this year, though WAPDA now says the facility's first units might not be commissioned until 2016.

For more news from Asia, visit here.

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