Pakistan wrestles with growing ‘Chinese corridor’ debt amid race to complete projects

BE2C2 Report — Two international lending institutions and Pakistan’s central bank have raised concerns about the debt burden of a huge China-led infrastructure program on the country’s improving but fragile finances.

Surging Chinese imports for the initiative, known as the China-Pakistan Economic Corridor program, have complicated Pakistan’s balance of payments problems during its second year of economic recovery following a decade of conflict with Taliban insurgents and their al-Qaeda allies, the Nikkei Asian Review reports.

Chinese machinery imports for power generation and transport infrastructure will reach $27.8 billion in the fiscal year ending in June 2021. The CPEC aims to finance and build transportation infrastructure worth $15 to $20 billion and energy infrastructure worth $35 to $45 billion across Pakistan.

The Pakistan government has said that further projects costing $16 billion are expected to be implemented by 2030, while preparations are continuing for additional elements following negotiations in December that expanded the program’s overall cost to $55 billion from $46 billion.

Pakistan and China have been close diplomatic and defense allies since the 1960s. Underlining the broadening of the relationship through CPEC, a 90-member honor guard from the People’s Liberation Army participated in Pakistan’s national day military parade in Islamabad on March 23 — the first appearance by Chinese troops overseas.

A Chinese truck convoy last November opened the overland route through Pakistan to the Indian Ocean port of Gwadar in Balochistan. (Courtesy CRS Public Relations)

However, the World Bank and the International Monetary Fund have both expressed concerns about the financial strains caused by the CPEC program. “Sovereign guarantees associated with the CPEC project [will] elevate fiscal risks over the medium-term,” the World Bank said in its Global Prospects Report for 2017, published in January.

In October, the IMF said the execution of CPEC projects would create a surge in foreign direct investment (FDI) and other external funding inflows, but the import requirements of these projects “will likely offset a significant share of these inflows, such that the current account deficit would widen.”

In a further illustration of international concern, the global credit ratings agency Fitch said on Feb. 6 that Pakistan’s “increasing gross external financing needs could increase the country’s vulnerability to shifts in investor sentiment.” Fitch affirmed its non-investment grade “B” rating for Pakistan’s sovereign debt, with a stable outlook.

The State Bank of Pakistan, the central bank, has been more cautious on the impact of CPEC, but warned in a monetary policy statement in January that “going forward, with the risks to the external sector, the need of financial inflows would grow further.”

Prominent local economists have also expressed serious concerns, according to reports.

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 the fiscal year ending June 2019.

A research report published by Topline Securities claimed that Pakistan will have to repay $90 billion for the $50 billion Chinese loans, investment and credit facility. It calculated a $3 billion figure, to be annually repaid. Some said it would be close to $3 billion while a former governor of State Bank bank Dr Ishrat Hussain calculated the eventual cost of $3.5 billion every year. “One must not forget that China’s investment is not a free aid, and Pakistan will have to pay for building the enormous infrastructure of roads, power projects and industrial zones,” an opinion piece in The News said. In return, China will gain access to a new seaport next to Gulf, and the origin of most of their oil imports and export destinations.

“The Pakistan Muslim League-Nawaz (PML-N) government is racing to complete numerous development projects before next election due in 2018, including some of the early harvest schemes related to the CPEC. This has alarmed many about Chinese loans and investments ultimate mammoth cost,” a senior Islamabad-based journalist said.

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