Amit Bhandari writes: China’s role in Pakistan’s economic crisis

Pakistan’s latest Economic Survey (2021-22) gives a glimpse of just how deeply it is indebted to China. It has a current debt of $87.7 billion. Its ongoing economic crisis can be traced to reckless borrowing, enabled by China. Meanwhile, even as the country risks a financial crisis, the military has awarded itself an 11 per cent increase in budgetary allocation, while other heads such as education, housing and health have seen their budgets slashed. This has created an unprecedented backlash against the military.

Given the role Chinese lending has played in the crisis in Pakistan and Sri Lanka, other lenders are coming around to the view that China must also take some of the haircuts and burden of debt relief to these countries directly. Funds from the IMF – which Pakistan is in negotiations with for its 22nd loan — and other aid providers, shouldn’t be used to repay opaque financing made on unfair terms.

China is Pakistan’s largest bilateral creditor, with outstanding loans of $14.5 billion – only the Asian Development Bank (ADB) at $14 billion and the World Bank (WB) at $18.1 billion have comparable amounts owed to them. 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 — the 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. It is not clear how much of this amount is still outstanding.

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 per cent), while loans from Chinese “commercial banks” are for shorter tenures (1-3 years) and at higher interest rates (Libor + 2.75-3 per cent). This means that while ADB/WB lending is around 3 per cent, loans made by Chinese banks are 5.5-6 per cent at current rates. This difference also extends to bilateral lending. Compared to other bilateral lenders, China’s loan tenures are shorter and interest rates higher. Bilateral loans from Germany, Japan and France charge interest of under 1 per cent, while bilateral loans from China are at 3-3.5 per cent.

The higher interest rates become evident when viewed along with 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. In the past two years, Pakistan has paid out just $7.6 million in interest to the Paris club – likely relief on account of Covid — while it has paid over $400 million to China.

A significant part of the Chinese lending has likely been for the China-Pakistan Economic Corridor (CPEC), an ambitious project undertaken on opaque terms. According to Pakistani media reports, the IMF wants Pakistan to renegotiate the CPEC energy deals before it agrees to assist Pakistan. Earlier research by Gateway House has shown that some of the loans made for CPEC Power projects were at Libor + 4-4.5 per cent, and the cost of projects was significantly higher than similar projects elsewhere.

Any lasting solution to the problems of these countries will have to involve China. It will have to chip in, in the form of lower interest rates, extended repayment periods and some debt forgiveness, if Pakistan and others like Sri Lanka, Maldives and Myanmar are to climb out of the financial hole they are in.

If China refuses to help solve a problem it has helped create, other lenders may also refuse to contribute: Why write off money that will then be used to pay off a single lender at everyone else’s expense? However, if China does write off some of its loans, it will face similar demands from other borrowers that signed up for the BRI. From an Indian perspective, the Chinese debt trap will limit Pakistan’s economic growth, in turn reducing its ability to cause mischief for India.

Bhandari is Senior Fellow for Energy, Investment and Connectivity, Gateway House. He is also the author of Chinese investments in India’s neighbourhood

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