Pakistan has a debt problem and China is making itunmanageable
The ongoing political and economic turmoil in Pakistan has made the country vulnerable to several crises. While many of them seem to have already hit the country, a few others are waiting to unleash their might on its poor citizens and fragile institutions. One of them is the mounting debt burden on Pakistan which has the potential to cripple its economy for decades to come.
By December 2022, Pakistan’s external debt had reached $126 billion; accounting for 35 per cent of its GDP. The problem is an outcome of legacy issues plaguing the Pak economy including dwindling foreign exchange reserves, high inflation, a lack of foreign investments and balance of payments difficulties. While the depreciation of domestic currency is resulting in expensive essential imports of fuel and edible oil, the skyrocketing inflation is leading to a humanitarian crisis with the shortage of food supplies. The balance of payments crisis is fueled by a swollen current account deficit and a decline in export earnings and workers’ remittances. Similarly, the ever bottoming level of forex reserves is making it difficult to cover imports and repay the country’s growing debt.
The consistent rise in debt burden has multiple causes, including poor economic management, corruption, excessive defense spending, and reliance on foreign loans. Broadly, the debt can be classified into four categories: multilateral debt, outstanding bilateral debt to the Paris Club countries, private and commercial loans, and Chinese debt. Among these, the multilateral debt, amounting to around $45 billion does not pose immediate challenge to the Pakistan’s economic stability due to its long tenure and concessional terms. Similarly, the Paris Club debt of around $9 billion is scheduled for repayment over decades with a low interest rate. However, the increasing volume of private and commercial loans (approaching $8 billion), including bonds and Sukuk have emerged as a major concern. Most of these loans are short-term and have high-interest rates attached to them, with a significant portion ascribed to Chinese financial institutions.
The increase in debt stock during recent years is mainly attributed to loans from China and from its commercial banks as Beijing accounts for about 30 percent of the country’s total external debt at present. While Pakistan is having a currency swap facility with the country, the repayment pressure in the short and medium term is a sore point. Notably, over 80 per cent of Pakistan’s bilateral debt service went to Beijing alone between July 2021 and March 2022.
A major portion of the increase in Chinese debt is considered the fallout of unviable CPEC projects and their un-equal terms for both countries. The loans under several long gestation CPEC components have led to huge repayment obligations. Indifferent to Pak woes, the Chinese investors are increasingly concerned about repatriation of their profits.
Between April 2023 and June 2026, Pakistan needs to repay around $75 billion which is about to 20 per cent of its GDP. The gigantic burden is posing a real risk of Pakistan defaulting on the dues during this period. Worse, the negotiations with the IMF for a bailout are taking longer than anticipated, putting the country’s financial stability at risk. Since, exports earnings, FDI and remittance inflows are crucial for debt repayment, Pakistan’s trademark trade deficits, lack of export diversification, low investor confidence, and rising costs of business are prominent obstacles. Clearly, the colossal debt cannot be managed by Islamabad without any help from its foreign investors and creditors.
This makes it imperative for the country to go for a fresh look at its foreign partnerships along with evaluation of their long-term benefits. While Pakistan claims its relations with China to be of ‘iron brotherhood’, the latter is alarmed about the security of its nationals working in the country. The other foreign investors were already concerned with the widespread terrorism in the country which hampers the flow of investment and aid.
Corruption is another issue that hinders socio-economic progress, distorts market mechanisms, and deters foreign investments. To address these challenges, Islamabad must find a balance between its total external debt and the volume of Chinese debt. Further, the country needs to closely scrutinize Chinese funds while working towards debt restructuring, raising investment inflows, fiscal prudence and credit diversification. Short term measures like rolling over of its debt at Chinese conditions is only going to trap the country further.