Pakistan’s financial crisis puts Belt and Road on the spot
Credit: Investors Lounge
By James M. Dorsey
Increased Pakistani dependence on China to help it avert resorting
to the International Monetary Fund (IMF) to avoid a financial and economic
crisis spotlights fears that the terms of Chinese investment in massive Belt
and Road-related projects would not pass international muster.
Concerns that China’s US$ 50 billion plus investment in
Pakistani infrastructure and energy, the Belt and Road’s crown jewel dubbed the
China Pakistan Economic Corridor (CPEC), potentially amounts to a debt trap,
compound suggestions that Pakistan increasingly will have no choice but to toe
Beijing’s line.
The concerns are reinforced by the vision spelled out in a draft
plan for CPEC. The plan envisioned a dominant Chinese role In
Pakistan’s economy as well as the creation of a Chinese style surveillance
state and significant Chinese influence in Pakistani influence.
Pakistani officials, concerned that Chinese loans offer a
band-aid rather than a structural solution, have cautioned China, in a bid to
keep the People’s Republic committed to bailing them out, that CPEC
projects would be at risk if their country was forced to seek help from the IMF.
The officials said that they would have to disclose the terms
of CPEC projects if they are forced to revert to the IMF and that this could
lead to projects being cancelled.
“Once the IMF looks at CPEC, they are certain to ask if
Pakistan can afford such a large expenditure given our present economic outlook,”
the Financial
Times quoted a Pakistani official as saying.
China has so far been willing to bail Pakistan out with
Chinese state-owned bank giving the South Asian country some $5
billion in loans in the last 12 months in addition to a US$1.5
billion trade facility.
Pakistan’s foreign currency reserves plunged to US$9.66
billion last month from US$16.4 billion in May 2017.
Pakistani efforts to avert a crisis could not come at a more
sensitive moment with elections scheduled for July 25. Political tension in the
country were heightened this week by the sentencing to prison on
corruption charges of ousted prime minister Nawaz Sharif and his daughter,
Maryam, as well as the likely participation
of a large number of Islamic militants in the polls.
To make things worse, China last month did not try to shield
Pakistan from being grey-listed by the Financial Action Task Force (FATF),
an international anti-money laundering and terrorism watchdog. that threatens
to impair the country’s access to international financial markets.
Pakistan is struggling to avoid being blacklisted
by the group.
Pakistani concern about disclosing terms of CPEC projects,
even if it may involve a degree of opportunistic hyperbole, reinforces
widespread worries in the country itself as well as in the international
community that Chinese-funded Belt and Road projects put recipients at risk of walking
into a debt trap and losing control of some of their key assets.
Malaysia this week suspended
China-backed projects worth more than US$20 billion on the grounds
that many made no financial sense. The projects included a railway and two
pipelines.
China has written off an undisclosed amount of Tajik debt in
exchange for ceding
control of some 1,158 square kilometres of disputed territory close to the
Central Asian nation’s border with the troubled north-western Chinese province
of Xinjiang. Sri Lanka, despite public protests, was forced to give
China a major stake in its port of Hambantota.
Pakistan
and Nepal withdrew last November from two dam-building deals. The withdrawal
coincided with mounting questions in Pakistan about what some saw as a neo-colonial
effort to extract the country’s resources.
A report published in March by the Washington-based Center
for Global Development warned that 23 of the 68 countries benefitting from Belt
and Road investments were “significantly
or highly vulnerable to debt distress.”
The centre said eight of the 23 countries – Pakistan,
Tajikistan, Djibouti, Kyrgyzstan, Laos. the Maldives, Mongolia, and Montenegro,
Pakistan, and Tajikistan – were particularly at risk.
Djibouti already owes 82 percent of its foreign debt to
China while China is expected to account for 71% of Kyrgyz debt as Belt and
Road-related projects are implemented.
“There is…concern that debt problems will create an
unfavourable degree of dependency on China as a creditor. Increasing debt, and
China’s role in managing bilateral debt problems, has already exacerbated
internal and bilateral tensions in some BRI (Belt and Road initiative)
countries,” the report said.
With analysts predicting that China will ultimately be
unable to stabilize Pakistan financially, Pakistan is ultimately likely to have
to revert to the IMF in a move that could seriously impact the Belt and Road
initiative, widely perceived as an infrastructure driven effort to cement
Chinese economic and geopolitical influence across a swath of land that
stretches from South-eastern Europe and the Atlantic coast of Africa to the
People’s Republic.
Analysts estimate that Pakistan this year needs US$ 25-28
billion to service its debt and ensure investor confidence in its ability to
put its financial house in order. An IMF
technical assistance team this week concluded a week-long visit to
Pakistan.
Said one analyst: “Ultimately, the IMF is Pakistan’s only
option. If an IMF-imposed regime has consequences for BRI (Belt and Road
Initiative) projects, it could impact perceptions of the terms China imposes.”
Dr. James M. Dorsey
is a senior fellow at the S. Rajaratnam School of International Studies,
co-director of the University of Würzburg’s Institute for Fan Culture, and
co-host of the New Books in Middle Eastern Studies podcast.
James is the author of The Turbulent World
of Middle East Soccer blog, a book with the same title as well as Comparative Political Transitions between Southeast Asia and
the Middle East and North Africa, co-authored with Dr.
Teresita Cruz-Del Rosario, Shifting
Sands, Essays on Sports and Politics in the Middle East and North Africa,
and the forthcoming China
and the Middle East: Venturing into the Maelstrom
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