Pakistan’s latest economic survey (2021-22) provides insight into the extent of its debt to China. It has a current debt of $87.7 billion. Its current economic crisis can be attributed to reckless borrowing, permitted by China. Meanwhile, even as the country faces a financial crisis, the military has granted itself an 11% increase in its budget allocation, while other items such as education, housing and health have seen their tight budgets. This created an unprecedented reaction against the army.
Given the role that Chinese loans have played in the crisis in Pakistan and Sri Lanka, other lenders are of the view that China should also bear some of the haircuts and debt relief burden directly. debt of these countries. Funds from the IMF – with which Pakistan is in negotiations for its 22nd loan – and other aid providers, should not be used to repay opaque financing provided 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 dollars have comparable amounts owed to them. However, this figure underestimates the true extent of Chinese lending to Pakistan in other categories. For example, China’s SAFE (State Administration of Foreign Exchange) has lent to Pakistan. The economic study lists $7 billion owed to “SAFE/TIME” (not specified in the budget documents), which likely includes loans made by SAFE.
Pakistan also owes $8.77 billion to “commercial banks”, which include West Asian banks 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 provided short-term loans worth $11.48 billion. It is not known how much of this amount is still outstanding.
The absolute amounts also do not take into account the different interest rates and tenors – most multilateral loans (ADB and WB) are for 25-30 years and were granted at much lower rates (Libor + 0.6 %), while loans from Chinese “commercial banks” have shorter terms (1-3 years) and higher interest rates (Libor + 2.75-3%). This means that while ADB/WB loans are around 3%, Chinese bank loans are 5.5-6% at current rates. This difference also extends to bilateral loans. Compared to other bilateral lenders, China’s loan terms are shorter and interest rates higher. Bilateral loans from Germany, Japan and France bear interest at less than 1%, while bilateral loans from China are at 3-3.5%.
The higher interest rates become evident when considered together with Pakistan’s interest payments to its creditors. In 2019-20, total loans to Pakistan by Paris Club countries and China were about the same, but interest outflows on Chinese loans were four times higher. Over the past two years, Pakistan have paid just $7.6m in interest to the Parisian club – likely a Covid relief – while they have paid over $400m to China .
A significant portion of Chinese lending has likely been for the China-Pakistan Economic Corridor (CPEC), an ambitious project undertaken on opaque terms. According to Pakistani media, the IMF wants Pakistan to renegotiate CPEC energy deals before agreeing to help Pakistan. Previous Gateway House research has shown that some of the loans made for CPEC Power projects were at Libor + 4-4.5%, and the cost of the 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 contribute, in the form of lower interest rates, extended repayment periods and some debt forgiveness, if Pakistan and others like Sri Lanka, the Maldives and Myanmar are to climb out of the abyss. financial situation in which they find themselves.
If China refuses to help solve a problem it helped create, other lenders may also refuse to contribute: why write off money that will then be used to pay off one lender at the expense of all the others? ? However, if China cancels some of its loans, it will face similar demands from other borrowers who have subscribed to the BRI. From India’s perspective, the Chinese debt trap will limit Pakistan’s economic growth, thereby reducing its ability to cause harm to India.
Bhandari is Senior Fellow for Energy, Investment and Connectivity, Gateway House. He is also the author of Chinese investments in the neighborhood of India