Will Pakistan follow Sri Lanka in a debt trap?
South Asia is in crisis, first a military coup in Myanmar then Kabul fell to the Taliban and finally Pakistan and Sri Lanka’s economies have taken a great hit.
Pakistan’s already fragile economy suffered another setback when recently China demanded repayment, by November 2023, of US$ 55.6 million for the Lahore Orange Line Project. Meanwhile at the end of March, the foreign exchange reserves held by the State Bank of Pakistan fell by a massive US$ 2.915 billion, due to repayment of external debt. Thus, Pakistan faces a bleak economic future in as far as relations with China are concerned. The Chinese company, China-Railway North Industries Corporation (CR-NORINCO) which completed the Lahore Orange Line Project in 2020 has demanded from the Punjab Mass Transit Authority, an outstanding sum of US$ 45.3 million by the end of March 2023 and the remaining outstanding of US$ 10.5 million by the end of the year. CR-NORINCO has insisted that all dues be repaid before the expiry of the contract on 16 November 2023.
China has made a hard bargain with Pakistan when it comes to paybacks on its loans and other investments in Pakistan. In the fiscal year 2021-2022, Pakistan paid around US $150 million towards interest to China for using a US$4.5 billion Chinese trade finance facility. In financial year 2019-2020, Pakistan paid US$120 million towards interest on US$3 billion loan. The Chinese demand for the Lahore Line payment was made in the first week of April 2022 when the new political dispensation under PM Shahbaz Sharif had just stepped into office. Earlier, at the beginning of March 2022 China acceded to Pakistan’s request to rollover a whopping US$ 4.2 billion debt repayment to provide a major relief for its all-weather ally.
Understanding the potential risks for Pakistan, PM Sharif, subsequently, sought to assuage Chinese feelings by saying,”I will take up this opportunity to convey my request to Beijing, NDRC (National Development and Reform Commission) and President Xi Jinping to reconsider [supporting] Karachi Circular Railway (KCR) for Karachi,” he said, adding that the project’s completion would lead to great positibe feelings for China among the people of Karachi and the rest of the country. During an address at the inauguration of a mass transit bus project from Peshawar Morr to Islamabad International Airport, he requested China to support the revival of KCR project. Sharif expressed gratitude towards China for “strengthening Pakistan’s economy” and supporting it on all international forums. Sharif tends ignore the Shylockian manner by which China first lends money to Pakistan and then pretends its pound of flesh.
The suicide attack at Karachi University in April 2022, has brought out the people to people animosity between China and Pakistan. Three Chinese language teachers were killed. According to sources at Karachi University, several Mandarin teachers at the Confucius Institute have been recalled to China after the suicide attack. The attack by the Balochistan Liberation Army (BLA) specially targeted Chinese nationals as BLA is known for its opposition to Chinese investment in Pakistan.
The Pakistan government has promised to step up security for Chinese workers, teachers and other professionals working in the China Pakistan Economic Corridor projects. Sindhi and Baloch activists have expressed their anger towards the telecom companies working in that region and are protesting against projects under the China Pakistan Economic Corridor and Belt and Road Initiative. They accuse the Chinese companies of not hiring local laborer’s and supplying information to the Pakistan Inter-Services Intelligence (ISI) and the Pakistan army who then quell the insurgency in a heavy-handed manner.
China has been quite stringent in recovering money from Pakistan. Take Pakistan’s energy sector for instance, where Chinese investors have repeatedly insisted on resolving issues relating to existing project sponsors in order to attract fresh investment. Some Chinese projects in Pakistan are facing problems in securing insurance of their loans in China due to Pakistan’s massive energy sector circular debt of about US$14 billion. Pakistan has to pay around US$1.3 billion to Chinese power producers and so far only US$ 280 million has been paid. Another example of hard bargaining by China over monetary dealings vis-à-vis Pakistan is well documented in the case of Dasu Dam Project. Last year, China demanded US$ 38 million towards compensation for the families of 36 engineers who had died in the Dasu Dam terror attack. Compensation was made a precondition for resumption of work on the project. To placate China, Pakistan subsequently agreed to pay US$ 11.6 million as compensation.
Pakistan’s fundamental challenge is that its economy is sinking and needs infusion of funds to survive. That is why a team of Pakistani officials held talks with the International Monetary Fund (IMF), in Qatar seeking the release of more funds from the US$ 6 bn bailout package agreed in 2019 to stabilise the country’s faltering economy. According to the IMF, Pakistan’s gross debt will come down slightly from 74% of GDP in 2021 to 71% GDP this year. Additionally, global development lenders have slashed economic growth forecast to 4 per cent significantly lower than 4.8 per cent targeted in the 2021-2022 Pakistan budgets.
While China is heavily responsible for Pakistan’s debt problem, it is the mishandling of Pakistan’s economy by successive governments that has led to the current impasse. Extensive loans taken from China, Saudi Arabia and Qatar as well as 13 loans from the IMF over 30 years (with most loan programmes called off mid-way for failure to fulfil loan conditions), is a major cause for the economic downturn. The 2019 US$ 6 billion IMF loan is also on hold, and China has dealt with Pakistan’s frequent requests to help. Ironically, Pakistan on its part is not shy of playing the loan addict.This strategy has not paid the dividends and is only making Pakistan sink deeper into debt. Pakistan must be closely watching developments in Sri Lanka, for it could be next nation to face the consequences of bad economic policies and heavy debt burdens. With elections due in Pakistan soon, the economic crisis is likely to dominate the decisions of the people. The challenge for any new government will be to find drastic solutions to difficult and complex problems.