Is China responsible for the debt issues that plague Sri Lanka and Pakistan? This is the pertinent and complex question that financial analysts are trying to answer.
Chinese financial disbursements to both of these countries remain very high despite the rather confused economic climate around the world.
The popular belief in the West and elsewhere in the world is that both Pakistan and Sri Lanka have come under the enormous influence of China over the past few years and unwittingly walked into massive debt traps that they are now trying to resolve with much vigour.
This is mainly due to China's Belt and Road Initiative, where countries receive massive loans to develop infrastructure projects. However, many of these countries have been unable to pay back the loans and are now facing crippling debt. This has caused immense strain on their economies and led to a situation where they are heavily reliant on China for economic aid. Nevertheless, Chinese aid comes with strings attached, so there is no escape route for the countries in the debt trap without committing collateral for Chinese debt. For example, the Hambantota Port in Sri Lanka is one for which the government signed a ninety-nine-year lease agreement with China.
It is no secret that China and Pakistan celebrate decade-long economic cooperation with enthusiasm as the China-Pakistan Economic Corridor, popularly known as CPEC, completes 10 years.
Known as the largest partner of Beijing’s Belt and Road Initiative (BRI), a global investment and infrastructure project, the China-Pakistan Economic Corridor was 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.
Pakistan had its own issues pertaining to terrorism when the rest of the world did not consider Pakistan the most profitable place to invest. Hence, Pakistan has some loyalty reposed to China as the country that helped them at a crucial stage. However, it has now come full circle as it has been placed in a precarious position requiring help from the International Monetary Fund (IMF).
The economic recession in 2018 and the subsequent devaluation of the Pakistani rupee caused the country's debt to soar. This, coupled with the increasing cost of terrorism, led to a drastic decrease in foreign investment, and the need for external financial assistance from the IMF has arisen.
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 Pakistan wasn’t seen as one of the most promising places to invest in, particularly," he said. "China reposed its trust in Pakistan at that time and dove right in. All in."
This is the view of a top-notch figure dabbling in the Pakistan-China issue. Nevertheless, the government of Prime Minister Shehbaz Sharif is saddled with severe economic problems that are similar to Sri Lanka's.
In February of this year, Pakistan received another $700 million loan from the China Development Bank. This loan boosted Pakistan's foreign exchange reserves by nearly 20%. The loan came as Pakistan struggled to negotiate a deal with the International Monetary Fund (IMF) regarding its 2019 bailout.
Finance Minister Ishaq Dar announced the development the same day that the country's National Assembly passed a money bill aimed at raising tax revenues. This was to fulfil the IMF's demands to seek out a $1.1 billion loan facility to avoid an economic meltdown. The loan will help Pakistan meet its financial obligations and stabilise the economy. The tax bill will ensure that the government has the necessary revenue to fund its operations. It is hoped that these two measures will help improve the economic situation in the country.
"This amount was expected to be received by the State Bank of Pakistan, which will shore up its forex reserves," Dar tweeted.
China is Pakistan's largest creditor, owning 30% of its external debt. Additionally, China charges higher interest rates than other lenders, which adds to Pakistan's debt servicing costs. Pakistani commercial banks borrow from Chinese banks at 5.5% to 6% interest, while other lenders offer funds at around 3%.
In the fiscal year 2021–2022, Pakistan paid around $150 million in interest to China for using a $4.5 billion Chinese trade finance facility. Therefore, the new China loan will only add to Pakistan's debt burden. This means that the new loan will increase the amount of money that Pakistan will need to pay in interest payments to China in the future, making it harder for Pakistan to pay back the loan and increasing its debt burden.
Now China is more aggressive in recovering money. Beijing has been using its economic prowess to negotiate deals with Pakistan in the energy sector. In addition, China has used compensation for the families of the engineers killed in the Dasu Dam terror attack as a bargaining chip to extract concessions from Pakistan.
While China's stern bargaining may have short-term benefits for China, it may not be sustainable for Pakistan.
Will China's funding push Pakistan towards a Sri Lanka-like financial crisis?
It is worth noting that China's debt diplomacy has also hurt Sri Lanka in the past. Sri Lanka borrowed heavily from China to finance infrastructure projects such as ports, highways, and power plants.
However, the country struggled to repay the loans, and China eventually took over control of the Hambantota Port on a 99-year lease. Critics have argued that China's lending practises in Sri Lanka and other countries are part of its larger strategy to expand its economic and geopolitical influence over the Indian Ocean region.
Uzair Younus, director of the Pakistan Initiative at the Atlantic Council’s South Asia Centre, told The Print (Indian Media) that more borrowing from China could cause trouble ahead. Younus says Pakistan has already taken on a sizable debt load from China. Any additional borrowing could have lasting consequences, as the country may not be able to pay back its loans in the long term. This could lead to increased pressure from China, which could destabilise the region.
Concerns about a Sri Lanka-type default are valid, given Pakistan's liquidity crisis. But I think the Chinese are not planning to move forward on a major project until broader macroeconomic risks are dealt with within Pakistan.
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 was 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 that 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. Pakistan continues to pay significant dollar payments for Chinese debt. Because of that, we continue to have a current account crisis and serious debt issues."
In 2018, complaining of unfavourable terms, then-Prime Minister Imran Khan's government reviewed CPEC projects. By 2021, the government had promised to prioritise the projects in a bid to revive cooling bilateral relations. This observer's belief stemmed from the Khan government's unease with CPEC's terms.
Sri Lanka faced a similar situation because of Chinese infrastructure projects launched during the Rajapaksa regime.
As Sri Lanka’s foreign exchange reserves dwindled under a mountain of debt early in the COVID-19 pandemic, some officials argued it was time to ask for a bailout from the International Monetary Fund. This was a politically fraught move that traditionally comes with painful austerity measures.
But China, Sri Lanka’s largest single creditor, offered a tempting alternative: Skip the IMF’s bitter medicine for now and just keep adding new debt to pay off the old, according to current and former Sri Lankan officials. Sri Lanka agreed, and $3 billion in new loans came from Chinese banks in 2020 and 2021.
Sri Lanka plunged into chaos later because that plan blew up. Amid crushing debt and sky-high inflation, the country has run out of U.S. dollars to pay for imports of basic goods, leaving citizens waiting for hours to buy fuel and major cities scrambling to keep the lights on.
By the time Sri Lanka finally applied for IMF relief, its economy was nosediving towards one of the deepest recessions since independence in 1948. This fueled a popular rebellion that saw the president chased from his home by hordes of demonstrators. This is what Chinese loans did to Sri Lanka, once a peaceful country in the Indian Ocean.
(Inputs from Indian and Pakistan media and international research sources)
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