Is Pakistan falling into China’s debt trap?

16 April 2018 by Abdul Khaliq

Gwadar, Pakistan - The heart of CPEC (China-Pakistan Economic Corridor)

• Pakistan will have to payback $100 billion to China by 2024 of total investment of $18.5 billion, which China has invested on account of bank loans in 19 early harvest projects, under CPEC.
• China has become the biggest lender to Pakistan after surpassing Japan. Pakistan owes $19 billion (1/5 of its total debt) to China. The CPEC loans will add $14 billion to Pakistan’s total public debt, raising it to $90 billion by June 2019, abating Pakistan’s economic ability to service huge amount of debt.
• Although CPEC has the potential to transform the Pakistan economy, but this transformation would come at heavy price of making Pakistan a colony of China. Piling up loans form China is a big gamble for Pakistan economy.
• Patterns of Chinese investments in South Asia-Pakistan, Bangladesh, Sri Lanka and Nepal-all of which are part of BRI, depicts Chinese propensity to control the domestic markets and the natural resources of the S. Asian nations.

With the start of China-Pakistan Economic Corridor (CPEC) [1] in 2013, the bulk of Chinese loans to Pakistan have increased many folds. Though there is no clear estimation in this regard, however, economists believe that around $19 billion out of total $90 billion foreign debt of Pakistan, is from China.

In other words, China has now become the biggest bilateral lender to Pakistan, surpassing Japan. According to the State Bank of Pakistan, by Jun 2017, [2] China’s bilateral debt to Pakistan was stood at $7.2 billion, which was increased by over $3 billion in four years. (It was $4 billion in Jun 13). Apart from bilateral debt, Pakistan currency swaps in Jun17 stood at $1.5 billion, [3] which took the figures to $8.7 billion.

The data further shows that by June 17, the Industrial & Commercial Bank of China (ICBC) Pakistan branch, [4] secured a loan of $2.7 billion from the parent company, and swapped Pak rupees with dollars, taking the debt to $12.1 billion. Similarly, the total Chinese private sector external loan has up from $3 billion in Jun15 to $7.2 billion in Dec17, happened mostly in the form of IPPs’ financing under CPEC and other projects.

In addition to this, Pakistan’s debt liabilities Liabilities The part of the balance-sheet that comprises the resources available to a company (equity provided by the partners, provisions for risks and charges, debts). to direct investors from China stood at around $3.5 billion. This amount is loaned to foreign investors operating in Pakistan. The biggest investment ($1.5 billion) by a foreign company in the last few years is from China Mobile, adding the toll to some $17.1 billion.

Since these statistics are based on June 2107, while Pakistan’s total external debt and liabilities have constantly increasing from $83.1 billion then to $88.9 billion by Dec17 and still growing. If we add the current year’s debt inflow of $1.6 billion so far, Pakistan’s total debt liabilities to China stand around $19 billion.

According to experts’ calculation, Pakistan will have to payback $100 billion to China by 2024 of total investment of $18.5 billion, which China has invested on account of banks’ loan in 19 early harvest projects mostly relating to energy sector under CPEC. [5] The 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. on these loans will be around 7% per annum payable Payable A sum of money that one person (debtor) or group of people owes to another (creditor). in 25 to 40 years. This means Pakistan would have to pay China roughly in between $7-8 billion as EM [6] for the next 43 years from 2018 onwards.

This situation does not augur well for Pakistan’s economy despite the prospective dividends of CPEC. In fact Pakistan heavily relies on CPEC and has put all its eggs in one basket. Piling up loans form China and building too much hopes on the CPEC may be a big gamble for Pakistan economy.

The proponents of CPEC rightly claim that Pakistan will have an increased FDI and other external funding inflows, however, they forget that this surge in imports required for the projects will likely generate a counterbalance. The real challenge will be how to manage increasing CPEC-related outflows; once Chinese investors started moving their profits back home to China.

Although CPEC has the potential to transform the Pakistani economy, but experts fear this transformation would come at heavy price of making Pakistan a colony of China. Prominent local economists have also expressed serious concerns over Pakistan’s ability to service the growing debt. Hafiz Pasha, a former finance minister, and Ashfaq Hassan, a former adviser to the Finance Ministry, have estimated that CPEC loans will add $14 billion to Pakistan’s total public debt, raising it to $90 billion by end June 2019. [7]

This is appalling scenario for Pakistan public debt, which is already reaching alarming stage, with debt-to-GDP GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
ratio galloping to 70%, burdening every Pakistani citizen with $982. The situation going fast from bad to worst as Pakistan has to recently raise loans from various IFIs by mortgaging its national assets; Motor Ways, Air Ports, radio & TV stations at 8.75% interest rate.

CPEC Impact on local economy

The Govt. of Pakistan and ruling elite views CPEC as game changer for the country and region, however, experts and local economists have different insights. They view CPEC has much less to offer Pakistan for trade. The Chinese approach of not partnering with local companies is not going to help create new job opportunities for millions of Pakistani youth.

On the other hand Pakistan govt. is awarding sweeping tax exemptions to Chinese firms, a situation which is creating damaging and discriminatory playing field against Pakistani firms virtually abolishing the remaining locally owned manufacturing sector in the country. As a result local markets are flooded with Chinese goods.

Then there are stories of malpractices in CPEC Projects. For instance violation of procurement rules also widely reported in media. Pakistani officials were reported to have said that the Chinese companies had refused to take part in international competitive bidding to get the contracts in the power sector, arguing if Pakistan wanted funding from Beijing for various projects, Beijing wanted the projects.

Emerging Chinese imperialism in South Asia

China’s Belt and Road Initiative raises debt risks not only in Pakistan, but also in some other South Asian countries, Bangladesh, Sri Lanka and Nepal, a Center for Global Development study found. [8] If we look at the patterns of Chinese investments in recent years in the said countries, it appears Chinese propensity for control over domestic markets and natural resources in this region.

Examining it carefully since the global financial crisis 2008 till 2016, Chinese investments in South Asia have concentrated mostly in two sectors of energy and transport. While 53% of these investments have been in energy projects, around 30% have been in transport schemes. Indeed, except Sri Lanka, where majority of Chinese investments have been in transport, similar investments in Pakistan, Bangladesh and Nepal have been overwhelmingly in energy. The share Share A unit of ownership interest in a corporation or financial asset, representing one part of the total capital stock. Its owner (a shareholder) is entitled to receive an equal distribution of any profits distributed (a dividend) and to attend shareholder meetings. of energy projects in total Chinese investments in these three countries during 2008-2016 is 68%, 55% and 68%, respectively. [9] Transport accounts for 27%, 36% and 8% of the share of total Chinese investments in these countries.

Chinese firms are making huge investments in gas projects and port facilities in Bangladesh and coal and road projects in Nepal. In Sri Lanka, transport and energy projects account for 58% and 9% of Chinese investments during 2008-2016. So is the case in coal-fired energy plants in Pakistan where Chinese companies expanding their control.

Major Chinese investments in Pakistan

The second phase of the China-Pakistan Economic Corridor (CPEC)–an ambitious plan to integrate sea and land routes across Eurasia under China’s Belt and Road Initiative, 5 major projects in Pakistan worth $57 billion include ; [10]

Gawadar Port: Gawadar Port is a main element of the CPEC. It is an alternative shipping route for transporting oil into China. Under the agreement, Chinese Overseas Ports will manage Gawadar free-trade zone on a 43-year lease with control of all the port’s business affairs.

Karot power station: This 720 megawatt hydro-project worth $1.42 billion is located in Azad Kshmir, would be completed by December 2021.

Direct current transmission line from Lahore to Matiari: The project worth $2 billion aims at producing 4,000MW of electricity from coal power plants. According to media reports, the Chinese company involved in the project has put the project on hold after just nine months owing to various problems, including differences with the government over the size of a revolving fund.

Karachi Circular Railway: This project, worth $2.07 billion would be completed by 2020. It faced lot of resistance from local residents, who refused to leave shantytowns built near the railway track after police demolished their homes.

Karakoram Highway: Beijing is financing the 1,300-kilometer Karakoram Highway that is currently the only overland cross border connection between China and Pakistan.

Orange Line Train, Lahore: The 27-kilometer metro train project cost $1.6 billion, out of which $300 million would come from the Federal Government of Pakistan, the rest is financed through loan by the Government of China. Govt. of Pakistan has approved Rs.20 billion in tax exemptions for the project.

The viability of these projects need a close examination, particularly the 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.
being charged by the China Development Bank and the China EXIM Bank. Official documents have revealed that with an estimated debt-equity Equity The capital put into an enterprise by the shareholders. Not to be confused with ’hard capital’ or ’unsecured debt’. ratio of 80%-20%, these investments guaranteed 17% to 20% rate of return [11] in dollar terms on their equity (only the equity portion, and not the entire project cost). According to analysts, China will recover its investment in less than 26 months, and bleed Pakistan for the rest of the 25-year contract period.

How China leaving developing countries into debt?

Pakistan need to look at the fallout from projects in Sri Lanka, Tajikistan, and several countries of Africa, all of which are now facing huge debt risks brought by Chinese investments. Let’s see what China did to other countries in the past. The recent data from the Centre for Global Development (CGD), [12] suggests China’s Belt and Road Initiative (BRI) program has already left several developing countries drowning into debt. [13]

Tajikistan: In 2011, Tajikistan wrote off an unknown amount of loan owed to China in exchange of 1,158 square kilometers of land and this was only 5% of the land what Chinese demanded.

Kyrgyzstan: Kyrgyzstan’s debt from infrastructure projects has rose from 62 % of the GDP to 78 %, while China’s share of this debt will jump from 37 % to 71 %.

Sri Lanka: In Sri Lanka, China did a debt to equity swap against $8 billion loan at 6% provided for construction of Hambantota Port against 99 years lease for managing port.

Venezuela: China has invested over $52 billion in Venezuela from 2008 up till 2014. All the Chinese loans to Venezuela were commodities Commodities The goods exchanged on the commodities market, traditionally raw materials such as metals and fuels, and cereals. -backed, under which Venezuela was obliged to keep supplying China millions of barrels of oil.

Nepal: In November 17, Nepal cancelled a $2.5 billion deal with China for the construction of a much-needed hydroelectric dam, because Nepalese officials were worried that the deal would align the country too closely with Beijing.


[1The key agreement for the projects listed under the CPEC was signed in 2013. The China-Pakistan Economic Corridor is a series of projects intended to modernize Pakistani infrastructure and strengthen its economy through construction of transport networks, energy projects and special economic zones whose cost has ballooned to $62 billion. The overall launching time span of CPEC spreads from 2014 to 2030. There are three phases for implementation of the projects. The short term, midterm-term and long-term projects are estimated to be completed by 2017, 2025 and 2030 respectively. It is the network of highways, railways, pipelines, transport, oil, gas and energy.


[4ICBC has more than three branches in Pakistan working since 2011, besides the Bank of China (BoC) commenced its business in the country, in September 2017

[6Equated Monthly Installment

Abdul Khaliq

CADTM Pakistan

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