Is China Responsible for Pakistan’s Debt Problem?

4 Min
Is China Responsible for Pakistan’s Debt Problem?

Pakistan and China are marking a decade of economic cooperation with much fanfare these days as the China-Pakistan Economic Corridor, popularly known as CPEC, completes 10 years. Experts say while the mega-project helped Pakistan develop much-needed infrastructure, the less-than-generous loans from Beijing coupled with Islamabad’s mismanagement has kept the project from turning Pakistan’s economy around.

Estimated to be the largest partnership of Beijing’s Belt and Road Initiative (BRI), a global investment and infrastructure project, CPEC launched in 2013 with more than $45 billion in planned investments. Over time, it grew to more than $62 billion, of which at least $25 billion was invested in Pakistan, according to both governments.

Mustafa Hyder Sayed, executive director of the Islamabad-based, nongovernmental Pakistan-China Institute, told VOA that the project came at a critical time for Pakistan.

“At that time, we had a lot of terrorism, there was a lot of turmoil and it [Pakistan] wasn’t seen as one of the best places to invest in, particularly,” he said. “And China reposed its trust in Pakistan at that time and dove right in. All in.”

Pakistani government data indicates CPEC has so far created 200,000 jobs, built more than 1,400 kilometers (897 miles) of highways and roads and added 8,000 megawatts of electricity to the national grid. The country’s deep-sea southwestern port of Gwadar, the centerpiece of CPEC, handled 600,000 tons of cargo in the last 18 months, according to officials.

At an event in Islamabad this week celebrating a decade of CPEC, Pakistani Prime Minister Shehbaz Sharif called the project a game-changer.

“And this was the result of vision and commitment and friendship,” Sharif told an audience of Pakistani and Chinese dignitaries.

Visiting Chinese Vice Premier He Lifeng, who received Pakistan’s highest civilian honor for his services in promoting economic cooperation, called the project exemplary.

“It has set an example of common trust and mutual development,” Lifeng said.

While Pakistan is among the top recipients of China’s infrastructure and energy investments, Islamabad now owes nearly one-third of its overwhelming external debt to Beijing.

Research shows that Chinese investments, largely shrouded in secrecy, do not come cheap. A 2021 report by U.S.-based research lab AidData found that most Chinese development financing in Pakistan between 2000 and 2017 were loans, not grants, given at or near commercial rates.

Pakistan-based economist Ammar Habib Khan, a nonresident senior fellow with the Washington-based Atlantic Council, told VOA this financial burden is partly why Pakistan has struggled to stimulate its economy through CPEC.

“A lot of that infrastructure came at a fairly high cost, and a lot of that borrowing was essentially in dollar terms and fairly higher than market terms,” he said. “Because of that, Pakistan continues to make significant dollar payments for the Chinese debt. Because of that we continue to have a current account crisis and some serious debt issues.”

In 2018, complaining of unfavorable terms, then-Prime Minister Imran Khan’s government set out to review CPEC projects. By 2021, the government was promising to prioritize the projects, however, in a bid to revive cooling bilateral relations that observers believe stemmed from the Khan government’s unease with CPEC’s terms.

Economist Khan said Pakistan definitely has a debt problem but not a Chinese debt problem. He blamed Islamabad for mismanaging resources.

“We added a lot of generation capacity, but we did not make efficient the distribution channels, due to which whatever electricity is generated, a lot of it is wasted,” Khan said.

That wasted electricity is costing the government millions of dollars every year, and its debt to power plants built under CPEC is piling up.

Islamabad and Beijing reject Washington’s assertion that China’s development financing to Pakistan and other BRI recipients is a debt-trap.

Pakistan has plenty of say in CPEC projects, Sayed said, through the Joint Coordination Committee that includes Chinese and Pakistani officials.

“So, this perception of China coming in by predatory financing and weakening a host country and gaining political influence is unfounded,” he said.

A report last year by Taiwan-based anti-disinformation lab DoubleThink’s China in the World network placed Pakistan at the top of the list of countries most exposed to Chinese influence.

According to the AidData report, Chinese loan terms are less generous than what Western countries usually offer. Khan said a lack of Western funding for Pakistan left Islamabad with little choice.

“The choice was simply whether to have a power plant or whether to have 12 to 15 hours of electricity shutdown,” Khan said. “So, yes, CPEC did provide Pakistan with a base of necessary infrastructure required for industrial growth. Meanwhile, Western countries have not been able to provide the same over the last many years.”

Under the BRI, China is spending over eight times more in Pakistan than the United States is, according to AidData’s research. The U.S. spends on soft infrastructure in Pakistan such as education, governance, and law and order capacity building, while China spends on hard infrastructure there.

Pakistan is the biggest recipient of China’s energy investment in Asia, while its share of BRI’s transportation and storage projects is the highest in the world.

Along with being Pakistan’s biggest single creditor country, China also routinely rescues it from economic collapse. In the last few months, Beijing rolled over close to $8 billion in debt, according to the Pakistani government, preventing Islamabad from default.

Experts say that to lessen the debt burden stemming from CPEC, Pakistan must find ways to efficiently use the energy and infrastructure it acquired through the mega-project and strengthen domestic production and exports.

— By Sarah Zaman in VOA, Aug 4, 2023