Pakistan’s debt from China becomes burden as CPEC does not generate enough growth

16 May by Abdul Khaliq

Gwadar, Pakistan.

“Gwadar, Pakistan.” by umairadeeb is licensed under CC BY 2.0.

Since 2013, Pakistan’s historical relationship with China has taken on a geopolitical role through the launch of the China-led infrastructure connectivity project, the China-Pakistan Economic Corridor (CPEC), a key part of the Belt and Road Initiative (BRI). The CPEC has been the focus of heated debate since its start. Proponents of this $46 billion project (upgraded to $62 billion) describe CPEC as a “game-changer” that will uplift Pakistan and adjacent areas of China and perhaps even reshape the economic geography of the region. However, others consider the project advantageous for China and not for Pakistan.

The loans under CPEC have been considered economically unviable, and subsequently, Pakistan is now having a hard time meeting its repayment obligations. It was warned by economic experts that when Chinese investors start repatriating profits and after 2021, when repayments are expected to rise, if the CPEC does not generate enough growth, then Pakistan’s debt from Chinese bank loans risks becoming a burden.

One project that has been included in the BRI and is especially strategic to China is Gwadar Port, located on the southwestern coast of Pakistan’s Baluchistan province. The government of Pakistan has always flaunted Gwadar Port as the engine of Pakistan’s economic growth, but it has not produced the desired results so far. Since the beginning, economic experts have argued that instead of Pakistan, the port will be beneficial for China since it will allow China to benefit from a shorter transportation route for the transportation of oil and gas from Gulf countries. The port is strategic not only due to its potential to shorten and secure routes; its location also acts as an alternative to circumvent potential threats to China’s energy imports should they be interrupted due to actions by rivals or due to territorial disputes in the South China Sea.
It is often touted by the government that Gwadar will become Dubai very soon, generating an economic boom in Pakistan. But those with deeper understanding see it as a seaport built for the purpose of re-exporting Chinese products brought into Pakistan via a land route. How is it possible to establish industrial zones and a megacity in Gwadar when there is no water available to support this development? Water is transported from Mirani Dam, some 133 kilometres from Gwadar.
The development of Gwadar Port and CPEC has never been appreciated by everyone. The issues of displacement of local fishing communities and environmental costs are fair concerns of the local people. Several coal-powered (71%) electricity projects based on imported raw materials have been launched, entailing massive environmental costs. The issue of the environment has also been raised by the Giglit-Baltistan region, the gateway of CPEC, as its environment may be affected due to transit traffic that will pass through its scenic mountain roads.

Most of the CPEC inflows are in the form of foreign direct investment, though the Pakistani government is indirectly liable for the repayment of loans taken out by independent power producers [1].

Will CPEC boost Pakistan’s economy?
For Pakistan, CPEC is more about building the country’s capacity in infrastructure and electric power. While CPEC inflows did contribute to a rise in economic growth in Pakistan from 2015–18, culminating in a rate of 5.8% in the 2018–19 fiscal year [2], they exacerbated the imbalance in the economy. It contributed to a rise in imports (machinery and material for electric power plants and road construction) as exports not only lagged behind but actually dropped in much of this period. The resulting balance of payments Balance of payments A country’s balance of current payments is the result of its commercial transactions (i.e. imported and exported goods and services) and its financial exchanges with foreign countries. The balance of payments is a measure of the financial position of a country vis-à-vis the rest of the world. A country with a surplus in its current payments is a lending country for the rest of the world. On the other hand, if a country’s balance is in the red, that country will have to turn to the international lenders to meet its funding needs. crisis forced Pakistan to return to the International Monetary Fund IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
for the twenty-second time in 2019.

While Pakistan’s chronically poor economic policies are the primary cause of its current economic crisis, CPEC aggravated the structural imbalances in an economy whose growth has been driven by consumption and government spending. The imbalance between imports and exports grows, and Pakistan, a net energy importer, struggles to find the dollars to pay for its imports. To avert a default, Pakistan then turns to the IMF and is compelled to compress economic activity. The economic viability of CPEC has always been a matter of concern for many in Pakistan. For instance, Pakistan has been facing a budgetary burden for protecting Chinese roads and sea convoys.

The government of Pakistan and ruling elite view CPEC as a game changer for the country and region; however, experts and local economists have different insights. They view CPEC as having much less to offer Pakistan in terms of trade. The Chinese approach of not partnering with local companies is not going to help create new job opportunities for millions of Pakistani youth. Since Chinese companies are tax-exempt, they bring everything from China, including labour, and hence they will have no reliance on Pakistani businesses to fulfil their demands. This has shattered the dreams of many local companies that planned to expand their production facilities in anticipation of receiving orders from these Chinese companies. The Chinese companies play smart and get excellent returns on their investments. Many experts see it as a threat for local businesses and fear that it won’t be a win-win situation for Pakistan.

Pakistan’s debt to China
China and Chinese commercial banks held about 30% of Pakistan’s total external debt of about $100 billion [3]. Much of that debt has come under CPEC. According to Bloomberg, at the end of the last financial year, Pakistan’s outstanding bilateral debt to the Paris Club Paris Club This group of lender States was founded in 1956 and specializes in dealing with non-payment by developing countries.

countries was about $10 billion. Meanwhile, it owed China $23 billion. Out of which, around $10 billion it owed to “commercial banks” were also owed to state-owned Chinese lenders operating as official financing arms for China’s Belt and Road Initiative. Between July 2021 and March 2022, over 80% of Pakistan’s bilateral debt service Debt service The sum of the interests and the amortization of the capital borrowed. went to Beijing.

China is Pakistan’s largest bilateral creditor, with outstanding loans of $14.5 billion; only the ADB ($14 billion) and the World Bank World Bank
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

($18.1 billion) have comparable amounts outstanding (refer to Table 1). However, this number undercounts the true extent of Chinese lending to Pakistan in other categories. For instance, China’s SAFE (State Administation 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 include banks from West Asia and three Chinese lenders: the Bank of China, ICBC, and China Development Bank, all state-owned banks. Between 2016–17 and 2020–21, the three Chinese lenders extended short-term loans worth $11.48 billion to China. But it is not clear how much of this amount is still outstanding.

Table 1: Pakistan’s Public Debt (31st March, 2022)

LenderAmount Outstanding ($ million)
Paris Club Countries 9,708
Japan 4,632
Germany 1,598
France 1,299
China (Bilateral) 14,503
SAFE/TIME Deposit 7,000
WB (IDA + IBRD) 18,149
Commercial Banks 8,770
Total Borrowings 87,359
Undisbursed Debt 17,762

Source: Pakistan Economic Survey 2021-22

The absolute amounts also don’t capture the different interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
and tenures: most of the multilateral loans (ADB and WB) are for 25–30 years and have been made at much lower rates (Libor LIBOR
London Interbank Offered Rate
An average rate calculated daily, based on transactions made by a group of representative banks. There are several LIBORs for some ten different currencies and some fifteen duration rates, from one day to twelve months.
+ 0.6%), while loans from Chinese ‘commercial banks’ are for shorter tenures (1-3 years) and at higher interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. rates (Libor + 2.75%–3%). This means that while ADB/WB lending is around 3%, loans made by Chinese banks are 5.5%–6% at present rates.

This difference also extends to bilateral lending. Compared to other bilateral lenders such as France, Germany, and Japan, China’s loan tenures are shorter and interest rates are higher (refer to Table 2). This means that while bilateral loans from Germany, Japan, and France charge an interest rate of under 1%, bilateral loans from China have interest rates of 3–3.5%.

Table 2: Selected Loans contracted by Pakistan during 2020-21

Amount of Loan (US$)Rate of InterestDuration (year)
Bilateral Lending
France 32.1 Fixed 0.75% NA
Multilateral Lending
ADB 900 Fixed 2%, 6-month Libor + 0.6% 15, 25
IDA WHAT’S THIS 3,633.6 Fixed 2% 30
Commercial Lending
China Development Bank 1,000 12-month Libor + 3% 1
ICBC 1,300 3-month Libor + 2.75% 2
Dubai Bank 825 12-month Libor + 2.05% 1

Source: Pakistan Economic Survey 2021-22

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 (refer to Table 3). In the past two years, Pakistan has paid out just $7.6 million in interest to the Paris Club—likely relief on account of the pandemic—while it has paid out over $400 million to China as interest.

Table 3: Pakistan’s Loan Repayments: Paris Club vs China (US$ millions)

Paris Club Members Total Loans 10,786 10,438
Principal Repayment 353.8 9.1
Interest Repayment 110.7 1.4
China Total Loans 10,777 14,180
Principal Repayment 421.6 135.5
Interest Repayment 450.8 169.8

Source: Pakistan Economic Survey 2021-22

There is a strong impression that Chinese loans are adding to Pakistan’s debt burden. However, some economists believe that corruption and mismanagement are also to blame for Pakistan’s economic woes.

There is a strong impression that Chinese loans are adding to Pakistan’s debt burden. However, some economists believe that corruption and mismanagement are also to blame for Pakistan’s economic woes.

Pakistan’s debt situation
At the moment, Pakistan faces a crippling economic crisis, with decades-high inflation Inflation The cumulated rise of prices as a whole (e.g. a rise in the price of petroleum, eventually leading to a rise in salaries, then to the rise of other prices, etc.). Inflation implies a fall in the value of money since, as time goes by, larger sums are required to purchase particular items. This is the reason why corporate-driven policies seek to keep inflation down. and critically low foreign exchange reserves depleted by continued debt repayment obligations. This nuclear-armed nation of over 240 million people, is racing down the road that leads to an inevitable default. The country is desperately looking for the completion of the ninth review of the IMF programme to get the $1.1 billion tranche. Though the government of Pakistan claims it has fulfilled all the conditions of the IMF, the multilateral lender has asked for more conditions to be fulfilled, asking that more funds be arranged from commercial banks or friendly countries before the release of the IMF tranche.

In yet another turn that has further eroded chances for revival of the $6.5 billion bailout package, the International Monetary Fund (IMF) has asked Pakistan to now arrange $8 billion in fresh loans to back the external debt repayments during the next seven months [4]. Pakistan, however, has not accepted the new additional financing demand on the grounds that the Fund’s current programme will end in June 2023 and it should not put conditions beyond the programme period.

According to media reports, the IMF wants Pakistan to renegotiate the CPEC energy deals with China before it agrees to assist Pakistan. The IMF’s demand to seek its approval on the upcoming budget for fiscal year 2023-24 has also not been met yet, further minimizing the prospects of an early completion of the pending 9th review of the Extended Fund Facility (EFF). Meanwhile Pakistan’s Finance MinThe IMF’s demand to seek its approval on the upcoming budget for fiscal year 2023–24 has also not been met yet, further minimising the prospects of an early completion of the pending 9th review of the Extended Fund Facility (EFF). Meanwhile, Pakistan’s Finance Minister has told the IMF that Pakistan has met all the prior actions. Saudi Arabia has promised to give $2 billion, while the United Arab Emirates has committed $1 billion in fresh loans. The remaining $3 billion can only be arranged once the IMF announces a staff-level agreement and the board approves the ninth review along with the $1.2 billion tranche.

Abdul Khaliq

CADTM Pakistan



8 rue Jonfosse
4000 - Liège- Belgique

00324 60 97 96 80