CPEC at 10: loans from China exacerbate Pakistan's risk of crisis

This month, China and Pakistan are marking 10 years of economic collaboration through China-Pakistan Economic Corridor (CPEC), a Pakistani component of Beijing's Belt and Road Initiative (BRI).

However, loans and financial agreements with China under CPEC during the past decade have exacerbated Pakistan's debt and made the country vulnerable to economic and political crises, say analysts.

Pakistan Prime Minister Shehbaz Sharif Wednesday (July 5) said his government is "accelerating the pace of CPEC, which is a game changer project to eradicate poverty, unemployment and economic slump".

"CPEC is a beautiful plan of connectivity of not only the regions but also the hearts of people," Sharif said in a statement released by Prime Minister House on the completion of 10 years of CPEC.

IMF bailout

Sharif's government faces a severe economic crisis.

By June, Pakistan's foreign currency reserves had dwindled to a level that could barely sustain one month's worth of imports, as Reuters reported at the time.

With Pakistan about to default, the West -- not China -- rescued it.

The International Monetary Fund (IMF) on June 30 bailed out Pakistan with a $3 billion loan programme, offering a desperately needed respite for the South Asian country.

The United States played a key role behind the scenes in helping Pakistan secure the bailout package with the IMF, Daily Dawn, citing diplomatic sources, reported Monday.

"Thanks to Washington, Islamabad has temporarily received crucial relief from the IMF for at least nine months," an Islamabad-based economist who works with the Pakistani Ministry of Finance said on the condition of anonymity.

"But without getting rid of Chinese debts, Pakistan cannot resolve its economic woes," he said.

Pakistan is one of a number of developing countries that are heavily indebted to Chinese lenders. These countries are also facing economic challenges, and they face a growing risk of defaulting on their loans to China.

A February analysis by the Middle East Institute found that about 30% of Pakistan's foreign debt is owed to China, including to state-owned commercial banks.

"Pakistan seems keener to take on new financing from China than China may be to furnish it," the think-tank noted.

"Even as the economy wobbles under a heavy debt burden and other acute challenges, Pakistani officials have sought support from China to upgrade the Main Line-1 (ML-1) railroad," it said.

The ML-1 railway is a CPEC-linked major rail project in Pakistan, as a recent example in which Pakistan recently agreed to increase the amount it is borrowing from China. The loan is growing from $6.8 billion to $9.85 billion.

CPEC's 10 years

CPEC has been the subject of heated debate since its inception in 2013.

The project is too costly and Pakistan will not be able to repay the loans it has taken out to finance it, say analysts.

"The loans under CPEC have been considered economically unviable, and subsequently, Pakistan is now having a hard time meeting its repayment obligations," wrote Abdul Khaliq, a Pakistani representative of the Committee for the Abolition of Illegitimate Debt (CADTM), a network of international activists headquartered in Belgium, on the CADTM website May 16.

"It was warned by economic experts that when Chinese investors start repatriating profits and after 2021, when repayments are expected to rise, if the CPEC does not generate enough growth, then Pakistan's debt from Chinese bank loans risks becoming a burden," Khaliq added.