Are Chinese Loans The Major Factor Behind Pakistan’s Debt Crisis?

Ahtasam Ahmad
Pakistan finds itself in a tight spot, as it is desperate to revive the International Monetary Fund (IMF) programme, yet the government is reluctant to pass on the economic burden of implementing the Fund’s conditionalities to the masses.

Though, some in the corridors of power might still believe that they can perform a balancing act, the IMF is in no mood to concede to Pakistan’s demands.

The ongoing talks are just a part of a long and strenuous process of financing the country’s needs to avert the looming crisis.

“Even if the best case scenario materialises, Pakistan will be back to square one by June,” stated economist Uzair Younas in a podcast. “The conclusion is clear, as soon as this programme ends, there is going to be another IMF programme,” added business and economy journalist, Khurram Husain.

The situation this time around is a bit different. In the past, economic crisis in Pakistan were driven by high balance of trade deficits that caused serious liquidity problems, but at present, the country is faced with a debt crisis.

Pakistan has more than 70 billion in repayment commitments over the course of next three fiscal years (including 2023). A major chunk of around 30 percent of Pakistan’s foreign debt is owed to China which as per former Finance Minister Miftah Ismail can be bifurcated into $4 billion deposits with the State Bank of Pakistan, $5-6 billion loans from Chinese (state-owned) commercial banks and around $20 billion for project loans is owed to China. Further, Pakistan’s public debt has more than doubled over the past decade with China being a primary contributor due to projects financed under China Pakistan Economic Corridor (CPEC).

(Read More: Mounting Debt And Lack Of Alternatives Calls For A Debt Restructuring Of Pakistan’s Economy. But Would It Be Possible?)

One can’t help but wonder whether the country was lured into a debt trap by China, similar to what is alleged by many western analysts in the case of other low-middle income countries like Sri Lanka.

Those quoting Sri Lanka as an example of what transpires after excessive economic reliance on China tend to overlook the fact that the majority (around 80 percent) of the island nation’s debt is owed to western countries and their allies.

Characteristics Of The Chinese Debt

Many around the globe are sceptical about debt from China due to stringent clauses attached to it. Among these are a few prominent ones including: 1) cross-default which allows Chinese lending authority a right to demand immediate repayment in case a country default on any other loan repayment (e.g. World Bank), 2) stabilisation clause that prevents a country to apply new laws to Chinese financed projects and 3) a clause that restricts borrowing country to compel China from agreeing to terms similar to what has been agreed on with other creditors like the Paris Club.

“China’s contracts also contain unique provisions, such as broad borrower confidentiality undertakings, the promise to exclude Chinese lenders from Paris Club and other collective restructuring initiatives, and expansive cross-defaults designed to bolster China’s position in the borrowing country. Our analysis also calls attention to terms that might be unremarkable in a commercial debt contract, such as the policy change event of default, which could acquire a different meaning and new potency in government-to-government lending arrangements,” reads a report by AidData.

Projects being financed by China in developing countries like Pakistan have a serious question mark over their economic feasibility. As per an article in RFE, “In the case of Pakistan, the country of 220 million people is the biggest single recipient of BRI financing worldwide and hosts the $62 billion collection of infrastructure projects known as the China-Pakistan Economic Corridor (CPEC). Similar to Sri Lanka, the viability of some projects have been brought into question in Pakistan, including a port project in Gwadar along the strategically important mouth to the Strait of Hormuz, which has often been trumpeted as a BRI priority.”

However, Chinese analysts debunk allegations of manipulation stating, “Many low- and middle-income countries prefer Chinese investment to that from the West, not only because China appears more like a benevolent creditor, but rich countries typically brand developing countries as high risks plus low rewards, and impose onerous conditions that delay project implementation and increase costs.”

Those quoting Sri Lanka as an example of what transpires after excessive economic reliance on China tend to overlook the fact that the majority (around 80 percent) of the island nation’s debt is owed to western countries and their allies.

there is hope for some concessions as China has shown tendency to provide relief to its borrowers as it recently cancelled 23 matured loans of 17 African nations.

Pakistan’s Case

The problem in Pakistan’s case, perhaps, lies with the planning or the lack of it, while conceiving the projects under CPEC. Miftah Ismail touched upon the issue in a session with Brookings Institution stating, “The power plants being built, or roads and highways being constructed (under CPEC) aren’t generating enough dollars (to repay loans) and neither are they improving productivity by that much.”

Economist Atif Mian, on the Brookings panel with Miftah, shared the same views, “If you can’t payback the loans then it means that you aren’t growing and the projects haven’t been that beneficial.”

Pakistan, however, isn’t concerned about the Chinese loans as it has recently approved $10 billion Mainline-I project of Pakistan Railways that is primarily financed by loans from China.

“Without reforming and restructuring its economy, additional debt taken on for infrastructure projects, whether from China or anyone else, is likely to exacerbate the challenges Pakistan is facing. Let’s say 4-5 years from now there’s another need for an IMF bailout. Then, such debts will be a sticking point,” stated, Uzair Younus, director of the Pakistan Initiative at the Atlantic Council’s South Asia Center in a comment for ThePrint.

Still, the matter of immediate concern is the external financing requirements and as explained earlier, the country is in no position to meet them. Therefore, a restructuring of its debt looks imminent. In that case, China would be a key player in the negotiations which are certainly going to be tough as Chinese playbook is very different from the West.

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“In the past, Beijing has tended to lend more money to some countries, including Argentina, Ecuador and Pakistan, so that they can continue to make payments on existing loans. China’s approach helps these countries afford imports of food and fuel, but leaves them with ever more debt. The United States prefers requiring government agencies and banks to forgive part of their loans,” reads an article in The New York Times.

A haircut, in the current situation, would be a tough ask from the Chinese as the financial institutions across the border have already been impacted by economic slowdown and a massive housing crisis (bad loans).

Getting the global powerhouse to agree on the same terms with other multilateral/bilateral lenders would be a hard sell for Pakistan.

Case in point, Zambia, where China wants multilateral development banks to offer debt relief, a proposal that the World Bank has explicitly rejected, as per the Bloomberg, leading to further complications of the African nations efforts to restructure its debt.

Yet there is hope for some concessions as China has shown tendency to provide relief to its borrowers as it recently cancelled 23 matured loans of 17 African nations.

February 05,2023


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