Burden of Chinese loans makes Pakistan increasingly vulnerable to crisis

ISLAMABAD -- Loans and financial agreements with China have exacerbated Pakistan's debt and made the country vulnerable to economic and political crises, say economists and other analysts.

The country is facing record inflation, fiscal imbalances and reserves that barely cover a month's worth of imports.

Pakistani Finance Minister Ishaq Dar on June 10 said that the government was contemplating restructuring its external bilateral debt, setting the tone for any future engagement with the International Monetary Fund (IMF).

Pakistan's IMF programme is set to run out this month with about $2.5 billion in funds yet to be released.

"Under the current circumstances, such as the impact of the COVID pandemic and natural disasters, Pakistan can seek debt restructuring from the bilateral creditors," Dar told reporters a day after releasing the budget for the 2023–2024 financial year.

Much of the problem comes from China.

Pakistan’s main creditors include China with a debt of about $27 billion and the Paris Club, a group of 22 major creditor countries, with a debt of $8.5 billion, according to an April report of the United States Institute of Peace (USIP).

Other creditors include the World Bank ($18 billion), the Asian Development Bank ($15 billion) and the IMF ($7.6 billion), the USIP report said.

Islamabad expects Beijing to reschedule its debts and prevent a default, even if the IMF does not co-operate, an anonymous Pakistani official told Nikkei Asia on Monday.

However, he conceded, "Currently, there is no indication that China will agree to Pakistan's request for rescheduling debt."

China has in the past ruled out any debt restructuring.

Chinese debt trap

The China-Pakistan Economic Corridor (CPEC), a Pakistani component of China's Belt and Road Initiative (BRI), also known as One Belt One Road (OBOR), has sparked criticism that it burdens Pakistan with debt and enables China to leverage "debt trap diplomacy".

Pakistan's foreign debt has roughly doubled since 2015 to more than $120 billion, the Financial Times reported May 24, citing the State Bank of Pakistan.

"The increase has been fuelled by rising commodity import bills, borrowing for projects including those that are part of China's BRI infrastructure initiative, and the fallout of the Covid-19 pandemic," the FT said.

CPEC was officially launched in April 2015 after the two countries signed 51 agreements and memoranda of understanding valued at $46 billion.

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

"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 wrote on the CADTM website May 16.

"The cost and financing terms extended by Beijing for executing all CPEC-linked projects are too expensive and overly exploitative and overly favour China," an Islamabad-based economist who works with the Pakistani Ministry of Finance said on the condition of anonymity.

Beijing gives money to developing countries only to ensure maximum profit, he told Pakistan Forward.

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