Pakistan’s debt from China becomes burden as CPEC does not generate enough growth

Abdul Khaliq (May 15, 2023): Since 2013, Pakistan’s historical relationship with China has taken a geopolitical role through the launch of China-led infrastructure connectivity project the China Pakistan Economic Corridor (CPEC), a key part of the Belt Road Initiative (BRI). The CPEC has been the focus of heated debate since its start. Proponents of this $ 46 billon project (upgraded to $62 billion) describe CPEC as a “gamechanger” that will uplift Pakistan and adjacent areas of China and perhaps even reshape the economic geography of the region. However, others consider the project as advantageous for China and not for Pakistan.

The loans under CPEC have been considered economically unviable, and subsequently, Pakistan is now having hard time to meet its repayment obligations. 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 risk becoming a burden.

One project that has been included in the BRI and especially strategic to China is Gwadar port, located on the southwestern coast of Pakistan’s Baluchistan province. The govt. of Pakistan always flaunted Gwadar Port as engine of Pakistan economic growth, but it could not produce desired results so far.  The economic experts since the beginning termed that instead of Pakistan, the port will be beneficial for China since it will allow China to benefit from a shorter transportation route for the transportation of oil and gas from gulf countries. The port is strategic not only due to its potential to shorten and secure routes, its location also acts as an alternative to circumvent potential threats to China’s energy imports should they be interrupted due to actions by rivals or due to territorial disputes in the South China Sea.

It is often touted by the govt. that Gwadar will become Dubai very soon generating economic boom in Pakistan. But those with deeper understanding see it as a seaport built for the purpose of re-exporting Chinese products brought into Pakistan via a land route. How is it possible to establish industrial zones and a mega city in Gwadar when there is no water available to support this development. Water is transported from Mirani Dam some 133 km from Gwadar.

 The development of Gwadar Port and CPEC have never been appreciated by everyone. The issue of displacement of local fishing communities and environmental cost are fair concerns of the local people. Several coal-powered (71%) electricity projects based on imported raw material have been launched, entailing massive environmental cost. The issue of environment has also been raised by the Giglit-Baltistan region, the gateway of CPEC, as its environment may get affected due to transit traffic that will pass through its scenic mountainous roads.

Will CPEC Boost Pakistan’s Economy?

For Pakistan, CPEC is more about building country’s capacity in infrastructure and electric power. While CPEC inflows did contribute to a rise in economic growth in Pakistan from 2015-18, culminating in a rate of 5.8 % in the 2018-19 fiscal year[1], it exacerbated the imbalance in the economy. It contributed to a rise in imports (machinery and material for electric power plants and road construction) as exports not only lagged behind, but actually dropped in much of this period. The resulting balance of payments crisis forced Pakistan to return to the International Monetary Fund for the twenty-second time in 2019.

While Pakistan’s chronic poor economic policies are the primary cause of its current economic crisis, CPEC aggravated the structural imbalances in an economy whose growth has been driven by consumption and government spending. The imbalance between imports and exports grows and Pakistan — a net-energy importer — struggles to find the dollars to pay for its imports. To avert a default, Pakistan then turns to the IMF and is compelled to compress economic activity. The economic viability of CPEC has always been a matter of concern for many in Pakistan. For instance, Pakistan has been facing budgetary burden for protecting Chinese roads and sea convoys.

The Govt. of Pakistan and ruling elite views CPEC as game changer for the country and region, however, experts and local economists have different insights. They view CPEC has much less to offer Pakistan for trade. The Chinese approach of not partnering with local companies is not going to help create new job opportunities for millions of Pakistani youth. Since, Chinese companies are tax-exempt, they bring everything from China including labor and hence they will have no reliance on Pakistani businesses to fulfil their demands. This has shattered the dreams of many local companies that planned to expand their production facilities in anticipation of receiving orders from these Chinese companies. The Chinese companies play smart and get excellent returns on their investments. Many experts see it as a threat for local businesses and fear that it won’t be a win-win situation for Pakistan.

China’s Debt to Pakistan

 China and Chinese commercial banks held about 30% of Pakistan’s total external debt of about $100 billion[2]. Much of that debt has come under CPEC. According to Bloomberg, at the end of the last financial year, Pakistan’s outstanding bilateral debt to the Paris Club countries was about $10 billion. Meanwhile, it owed China $23 billion. Out of which around $10 billion it owed to “commercial banks” were also to state-owned Chinese lenders operating as official financing arms for China’s Belt and Road Initiative. Between July 2021 and March 2022, over 80% of Pakistan’s bilateral debt service went to Beijing.

China is Pakistan’s largest bilateral creditor, with outstanding loans of $14.5 billion – only the ADB ($14 bn) and the World Bank ($18.1 bn) have comparable amounts outstanding (Refer Table 1). However, this number undercounts the true extent of Chinese lending to Pakistan under other categories. For instance, China’s SAFE – State Administration of Foreign Exchange – has lent to Pakistan. The Economic Survey lists $7 billion owed to SAFE/TIME (Not clarified in the budget documents), which likely includes loans extended by SAFE.

Pakistan also owes $8.77 billion to ‘commercial banks’, which includes banks from West Asia and three Chinese lenders – Bank of China, ICBC and China Development Bank, all state-owned banks. Between 2016-17 to 2020-21, the three Chinese lenders extended short term loans worth $11.48 billion to China. But it is not clear how much of this amount is still outstanding.

Table 1: Pakistan’s Public Debt (31stMarch, 2022)

Lender Amount Outstanding ($ million)
Paris Club Countries 9,708
–          Japan 4,632
–          Germany 1,598
–          France 1,299
China (Bilateral) 14,503
SAFE/TIME Deposit 7,000
ADB 14,028
WB (IDA + IBRD) 18,149
Commercial Banks 8,770
Total Borrowings 87,359
Undisbursed Debt 17,762

Source: Pakistan Economic Survey 2021-22

The absolute amounts also don’t capture the different interest rates and tenures –most of the multilateral loans (ADB and WB) are for 25-30 years and have been made at much lower rates (Libor + 0.6%), while loans from Chinese ‘commercial banks’ are for shorter tenures (1-3 years) and at higher interest rates (Libor + 2.75%-3%). This means that while ADB/WB lending is around 3%, loans made by Chinese banks are 5.5%-6% at present rates.

This difference also extends to bilateral lending. Compared to other bilateral lenders such as France, Germany and Japan, China’s loan tenures are shorter and interest rates higher (Refer Table 2). This means that while bilateral loans from Germany, Japan and France charge an interest of under 1%, bilateral loans from China are at interest rates of 3-3.5%.

Table 2: Selected Loans contracted by Pakistan during 2020-21

Amount of Loan (US$) Rate of Interest Duration (year)
Bilateral Lending
France 32.1 Fixed 0.75% NA
Germany 77.3 Fixed 0.25% 40
China 1,000 12-month Libor + 1% 1
Multilateral Lending
ADB 900 Fixed 2%, 6-month Libor + 0.6% 15, 25
IDA WHAT’S THIS 3,633.6 Fixed 2% 30
Commercial Lending
China Development Bank 1,000 12-month Libor + 3% 1
ICBC 1,300 3-month Libor + 2.75% 2
Dubai Bank 825 12-month Libor + 2.05% 1

Source: Pakistan Economic Survey 2021-22

The higher interest rates become evident when viewed along with at Pakistan’s interest payments to its creditors. During 2019-20, the total lending to Pakistan by Paris Club Countries and China was about the same – but the interest outflow on Chinese loans was four times higher (Refer Table 3). In the past two years, Pakistan has paid out just $7.6 million in interest to the Paris club – likely relief on account on the pandemic, while it has paid out over $400 million to China as interest.

Table 3: Pakistan’s Loan Repayments: Paris Club vs China (US$ millions)

2019-20 2020-21 2021-22
Paris Club Members Total Loans 10,786 10,438
Principal Repayment 353.8 9.1
Interest Repayment 110.7 1.4
China Total Loans 10,777 14,180
Principal Repayment 421.6 135.5
Interest Repayment 450.8 169.8

Source: Pakistan Economic Survey 2021-22

There is strong impression that Chinese loans are adding Pakistan’s debt burden. However, some economists believe that corruption and mismanagement are also to blame for Pakistan’s economic woes.

Pakistan’s Debt Situation

At the moment, Pakistan faces a crippling economic crisis, with decades-high inflation and critically low foreign exchange reserves depleted by continued debt repayment obligations. This nuclear-armed nation of over 240 million people, is racing down the road that leads to inevitable default. The country is desperately looking for the completion of the ninth review of the IMF program to get $1.1 billion tranche. Though government of Pakistan claims it has fulfilled all the conditions of the IMF, but the multilateral lender has asked for more conditions to be fulfilled, asking that more funds be arranged from commercial banks or friendly countries before the release of the IMF tranche.

In yet another turn that has further eroded chances for revival of the $6.5 billion bailout package, the International Monetary Fund (IMF) has asked Pakistan to now arrange $8 billion in fresh loans to back the external debt repayments during the next seven months[3]. Pakistan, however, has not accepted the new additional financing demand on the grounds that the Fund’s current program will end in June 2023 and it should not put conditions beyond the program period.

According to media reports, the IMF wants Pakistan to renegotiate the CPEC energy deals with China before IMF agrees to assist Pakistan[4]. The IMF’s demand to seek its approval on the upcoming budget for fiscal year 2023-24 has also not been met yet, further minimizing the prospects of an early completion of the pending 9th review of the Extended Fund Facility (EFF). Meanwhile Pakistan’s Finance Minister has told the IMF that Pakistan had met all the prior actions. Saudi Arabia has promised to give $2 billion while the United Arab Emirates has committed $1 billion in fresh loans. The remaining $3 billion can only be arranged once the IMF announces staff-level agreement and the board approves the ninth review along with the $1.2 billion tranche.






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