China’s debt trap policy and its huge investments in Pakistan

@AdityaAlex10

New Delhi: The strategic relevance of China in the South Asian region stems from the fact that Pakistan and China have mutual interests. Trading relations between the two nations were developed in the 1960s, from the first trade agreement signed in 1963. Moreover, China has become Pakistan’s largest trading ally.

Furthermore, with the 2013 China-Pakistan Economic Corridor (CPEC), the trade volumes between the two countries are likely to rise further.

The two nations established diplomatic ties in the 1950s. Pakistan was one of the first countries to recognize the communist Republic of China. This acknowledgment was beneficial to China since it cleared the path for connectivity to other non-communist nations. 

Since China was isolated internationally until the 1970s, Pakistan functioned as a conduit between the United States and China through diplomatic arbitration. Over this historical framework of fraternal assistance, China regards Pakistan as a faithful ally who stands by the nation through tough times and provides a link to end international isolation.

The extent of Pakistan’s Chinese debt is revealed in the latest economic survey. Higher interest rates on Chinese loans, reckless borrowing, and a bloated defense budget exacerbate Pakistan’s already fragile financial situation. 

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China’s outstanding loan to Pakistan is $14.5 billion, while the Asian Development Bank ($14 billion) and the World Bank ($18.1 billion) have similar amounts. Other sorts of loans, such as those made by China’s State Administration of Foreign Exchange (SAFE), which has loaned Pakistan over $7 billion, are not included in the budget report. 

Pakistan additionally owes $8.77 billion to ‘commercial banks,’ including the Bank of China, ICBC, and China Development Bank, all of which are state-owned.

According to the economic survey of 2021-22, Pakistan’s request for defense budget assistance from China has increased by 11%, while the budget for Education, Welfare, and Healthcare has been substantially reduced.

This implies a divergence from welfare-oriented policies for the citizens of Pakistan. Expenditure for the development sector has been cut by 11%, as has healthcare spending (31%), education (1.5%), and housing (77%). 

Pakistan’s already ailing economy faced another blow when China recently sought USD 55.6 million in payments for the Lahore Orange Line Project, which established a network of metro lines in the city, by November 2023, according to the Italian newspaper Osservatorio Globalizzazione.

When it comes to recovering its loans and other investments in Pakistan, China has struck a tough bargain with the country. Pakistan paid roughly USD 150 million in interest to China for utilizing USD 4.5 billion Chinese trade financial assistance in the fiscal year 2021-2022. Pakistan paid USD 120 million in interest on USD 3 billion in loans for the fiscal year 2019-2020.

China exaggerates the advantages of these infrastructure projects, offers credit on onerous terms (via its own export-import bank which China unofficially controls), and when the bill comes due and its debtors are unable to pay, demands control over the infrastructure and regional influence to compensate. This strategy has been termed ‘debt trap diplomacy.’ 

Pakistan’s policymakers must look inside and undertake the difficult task of rebuilding and overhauling the economy. This is also in the interests of the United States and China, both of which want to see a socially and economically stable Pakistan capable of repaying its obligations and creating economic possibilities for its tens of millions of residents, the bulk of whom are all under the age of 30.

It is critical for Islamabad to realize that success in its geo-economic pivot involves the implementation of substantial reforms that enhance Pakistan’s overall economic prospects. Only through making tough decisions will Pakistan be able to attract the additional capital flows that its economy needs to modernize and achieve greater rates of development. If their reforms are not restructured, the country will shortly discover that even China is hesitant to continue supporting a critical ally.