Why it’s WRONG to scapegoat China for Pakistan’s debt crisis?

BY WANG XIAOZHU

 

Scapegoating China for Pakistan’s current balance of payments crisis is wrong, as the China-Pakistan Economic Corridor (CPEC) has been blamed in recent months for causing huge debts to the Islamabad, whose economy is faltering.

Such views ignore a key fact that China, by promoting the CPEC, has bigger strategic intention than purely pursuing economic gains.

CPEC, the flagship project of the Belt and Road Initiative, is under the spotlight in recent months, as Beijing is blamed for burdening Pakistan with expansive loans to push the country into a “debt trap”.

Pakistan should cautiously consider the cooperation with China, as risks cannot be undervalued despite the country does need more infrastructure, Maurice Obstfeld, chief economist and economic counsellor of the International Monetary Fund (IMF), said on Tuesday.

facebook-cooments-image“The design of the projects, and the governance of the projects must be sound, to make sure no excessive debts are made,” Obstfeld told a press briefing at IMF’s annual meeting in Bali, Indonesia, according to a source who attended the it.

The comment came as Pakistan is reportedly seeking a bailout package from IMF, the Washington-based lender, to stabilise its teetering economy and plug dwindling reserves.

The recent development of Saudi Arabia being invited to invest in CPEC was also paraphrased as Pakistan’s desperate for funding to alleviate a “financial crisis fueled in part by mounting debt to China”.

Pakistan China
A Pakistan Navy soldier stands guard while a loaded Chinese ship is readied for departure prior to a ceremony at Gwadar port, about 700 km west of Karachi. AP Photo/Muhammad Yousuf

The fact is…

But there is little evidence that the current crisis in Pakistan was spurred by its debt obligations to China.

According to the State Bank of Pakistan, in 2017 Pakistan’s debt servicing amounted to $5 billion, of which only $500 million or about 10 percent went to China.

Looking at the loan portfolio, some 60 percent of foreign loans are owed to multilateral foreign institutions (42 percent) and members of the Paris Club (18 percent).

Pakistan faced similar balance of payments crisis in 2000, 2008 and 2013 or whenever there was a change of government, Dr Manzoor Ahmad, the country’s former ambassador to the WTO from 2002 to 2008, wrote on the Express Tribune on Monday.

“This was more to do with the incumbent governments postponing many fiscal decisions near the end of their tenures but still going on a spending spree to get more votes in next elections,” he argued.

The latest crisis was caused by the same set of factors that spurred previous ones: serial fiscal irresponsibility by successive civilian and military governments; persistent overvaluation of the rupee, which is a drain on foreign reserves; growing trade deficits caused in part by declining export competitiveness and in part by Pakistan’s dependence on fuel imports; and a narrow tax base that habitually excludes most of Pakistan’s governing elite, James Schwemlein, an independent consultant and a former US diplomat wrote on Foreign Policy.

Chinese and Pakistani officials have claimed that the bulk of the borrowing related to CPEC was structured with long-term schedules for repayment (20 to 30 years) and a five-year grace period built in, he noted.

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Beijing aims for more

The Chinese investment has helped Pakistan upgrade and construct new highways and power plants that have effectively addressed electricity shortages in Pakistan. It has also created more than 70,000 jobs for locals, according to Voice of America.

CPEC, the massive ongoing project, is estimated to bring $62 billion in Chinese investments to Pakistan over the next 15 years for building transportation networks, special economic zones and power plants to help Islamabad improve its manufacturing capacity and overcome energy shortages.

China has already invested more than $19 billion in 22 “early harvest” projects in Pakistan since the two countries launched the massive infrastructure development project four years ago.

Wang Yi, China’s foreign minister has recently said that only about $6 billion has been given to Islamabad as concessional loans, with an interest rate of just over 2 percent and a grace period varying from five to eight years. The loan repayment timeframe for different projects ranges from 12 to 15 years.

The rest has come from China as direct foreign investment or assistant to Pakistan, he added.

China eyes far beyond economic gains by promoting the project, which will bridge China into Iran and the Arabic world, key areas of the grand Belt & Road Initiative.

Having sound relations with neighbouring states is a foundation for China to push forward the Belt and Road Initiative, a Beijing-based foreign affairs analyst said, explaining why it’s impossible for China to “baffle” Pakistan with CPEC or the so-called “debt trap”.

 

The writer is a foreign affairs analyst

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