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Pakistan’s Union Finance Minister Ishaq Dar announced that he would get a $700 million loan from China. A slight increase in Pakistan’s dwindling foreign exchange reserves may account for his happiness. But loans from China and Chinese banks now account for one-third of Pakistan’s total debt.
In Pakistan’s total debt, there has been a significant increase in loans from China and Chinese commercial banks over the last eight years.
One of the main reasons for such a situation is the repatriation of foreign loans to Pakistan’s current economic condition, due to which the country’s foreign exchange reserves are depleting significantly.
It is to be noted that Pakistan has to repay a huge amount of foreign debt in the current financial year and in the next two financial years.
In the remaining months of the current fiscal year, Pakistan has to repay foreign debt worth eight billion dollars.
Paying back the $50 billion foreign debt over the next two years will be Pakistan’s biggest challenge. This includes debt owed to China and Chinese commercial banks.
Pakistani economists believe that the loan repayment facility received from China will definitely reduce the risk on Pakistan’s economy. But along with this, restructuring of loans from other countries and international financial institutions is also very important.
In the first decade of the current century, the proportion of debt provided by the member countries of the Paris Club was a major part of Pakistan’s total debt. But in the last seven to eight years, China’s lending has been very high. Along with this, the debt of Chinese banks has also increased significantly.
Economists believe that the Pakistan-China Economic Corridor (CPEC) is also a reason for the increase in Chinese debt. In this, money was received from China in the form of loans for energy and infrastructure projects. Also borrowing from Chinese commercial banks to increase foreign exchange reserves.
A recent example of this is the China Development Bank’s $700 million loan. Finance Minister Ishaq Dar said that this will help increase foreign exchange reserves.
But the question arises whether this debt is the real cause of Pakistan’s economic woes.
The BBC spoke to experts to find out the answer to this question. Despite contacting Pakistan Finance Ministry officials, there was no response.
Finance Minister Ishaq Dhar, Minister of State for Finance Dr Ayesha Ghouz Pasha and the spokesperson of the Finance Ministry did not respond to calls and messages in this regard.
How much of Pakistan’s total debt was given by China?
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Pakistan’s total external debt now exceeds $97 billion. This includes loans to international financial institutions, various countries, foreign commercial banks and the international bond market.
The loan includes loans from the Paris Club, IMF, World Bank, Asian Development Bank and other international financial institutions, according to the State Bank of Pakistan.
Looking at Pakistan’s debts over the past seven years, external debt has increased from 24% of GDP in 2015 to 40% of GDP in 2022.
Pakistan’s total debt includes loans from international financial institutions, other countries and commercial banks, but reports by the Government of Pakistan and the Central Bank show that those loans are from the ‘Paris Club’ and ‘non-Paris Club’. No country is mentioned in connection with this loan.
However, in Pakistan’s debt profile report submitted by the International Monetary Fund after the last review exercise, China’s share of Pakistan’s total debt was 30%.
The Chinese government has so far issued $23 billion in loans, according to the International Monetary Fund. At the same time, Chinese commercial banks have so far provided about $7 billion in loans.
“The loan given by the Chinese commercial banks is also a loan given by China. It should be understood that China’s commercial banks operate under government supervision just as national banks in Pakistan are run by the government,” economist Ammar Habib Khan told BBC News.
Why did China’s debt increase?
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China and its commercial banks account for about 30 percent of Pakistan’s total external debt. Looking at the loan repayment figures for the last financial year, China and China’s commercial banks have the highest loan repayments.
In the first quarter of the current fiscal year, more than $500 million more, including interest, was repaid to China than to Saudi Arabia, according to debt repayment data on the website of the Department of Economic Affairs. Saudi Arabia, Japan, Kuwait and France had the lowest debt repayments.
Similarly, the amount of loans repaid to foreign commercial banks, which mostly include Chinese commercial banks, is also high.
Speaking to BBC News about China’s increase in Pakistan’s total external debt over the last seven or eight years, Pakistan’s former finance minister, Dr Hafiz Pasha, said, “China offers three types of credit. China provided loan for CPEC project. The second loan was provided by Chinese commercial banks. The third loan is the amount deposited by China in the State Bank of Pakistan,” he said.
”The reason for the increase in Chinese loans in Pakistan’s debt is the credit given for CBEC projects and the deposits China has given to Pakistan. As a result, China’s total debt to Pakistan has increased by 25 to 30 percent,” noted Amreen Sorani, economic affairs expert at JS Research.
”Loans were extended to Pakistan by China and its commercial banks for various purposes of CPEC. However, the challenge for Pakistan at the moment is the loans given by China and its commercial banks to reduce the current account deficit and increase foreign exchange reserves,” said Shahbaz Rana, a senior economic affairs journalist in Islamabad.
”Credits given in the energy sector in CPEC were given to Independent Power Producers (IPRs). And they are not included in Pakistan’s total debt, although the projects given for infrastructure projects like Sikar Multan Motorway, Thakot Motorway are mentioned in it,” he added.
Is China’s debt the real cause of Pakistan’s economic crisis?
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Talking about the difficulties in repaying the Chinese debt, Shahbaz Rana said, “When it comes to repaying the Chinese debt, Pakistan’s borrowings for foreign financing needs are major. These are received from commercial banks,” he said.
“The repayment period of this Chinese loan is one-and-a-half to two years. The maturity of the loan will come very soon. Because of this, a country like Pakistan, which is suffering from foreign exchange shortage, is facing problems,” he said.
The repayment period of loans available under Paris Club is longer. It ranges from 15-20 years to 25-30 years. However, Shahbaz Rana said that the loan repayment period of Chinese commercial banks is short.
Ammar Habib said in this regard that there is no great difficulty in repaying the Chinese debt. These will be rolled over, he said.
This loan is for one or two years. Both parties know that this should be rolled over. So it will roll over, he pointed out.
“The loan tenure for the projects is long. There is a process of making the deposit. The same is true for Chinese deposits as for deposits from other countries,” noted Amrin Sorani.
The share of Chinese debt in Pakistan’s total debt has increased, meaning Pakistan now owes more to China, says Yusuf Nasser, a financial expert and former Citibank banker.
”The loan taken under CPEC has to be repaid in foreign currency. Whereas the income of these projects is in Pakistan Rupees. This definitely has an impact on foreign loan repayments,” he said.
Similarly, if you look at the interest rate of the Commercial Bank of China loan, its interest rate is much higher than that of World Bank and IMF loans. Yusuf added that for a country like Pakistan, even half a percent additional interest on billion dollars would have a big impact.
What can China do to help in this economic crisis?
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The proportion of Chinese debt in Pakistan’s outstanding debt has increased over the past seven to eight years. In this respect Pakistan owes more to China than any other country.
The facility to roll over these loans is essential for Pakistan. Ammar Habib said that these rollovers happen and continue to happen because both parties understand that the rollover should be done once the repayment period is over.
Chinese loans should be rolled over. Do not reset. New conditions are fixed in restructuring. But Amrin Sorani mentioned that this will not happen in the roll over.
An example of this, he said, was the approval of a $700 million loan to Pakistan from a Chinese bank.
It’s kind of a roll over. Because the same loan that Pakistan had repaid some time ago has been reissued as a rollover, he said.
”In mutual loans the loan repayment period is fixed. But international financial institutions do not do this,” noted Dr Pasha.
Pakistan has already rescheduled loans from the Paris Club. It would not be appropriate to repeat it. But he added that China’s facility would be useful for Pakistan.
“Pakistan owes more debt to China. So indeed China can help a lot in this regard. China and international financial institutions should meet to discuss debt restructuring. But so far no such signal has been received from China,” said Yusuf Nasser in this regard.
“China’s debt is too high at the moment. However, Pakistan’s debt restructuring can be done with the help of World Bank and IMF. Because creditor countries or organizations working together is not a new thing. Earlier, members of the Paris Club also got together and did this,” he added.
Will the situation of Sri Lanka also come to Pakistan?
Professor Ramu Manivannan, an expert in international affairs, who says that Pakistan is in a bad situation, says that Pakistan has no other option but to borrow money from China.
“Pakistan’s economy today is in a situation where it has to pay interest on loans and interest on interest. If we ask for a loan from the Western countries or the IMF, they will propose some harsh measures such as structural change, political conditions, change in the banking system. Pakistan’s economy or political environment is not in a position to accept that. So we have to borrow from China. They also know it will not be advantageous.
We will know what the impact will be only after the details of what conditions China is putting forward for this USD 700 million loan,” says Professor Ramu Manivannan.
Continuing, he said, “Sri Lanka’s debt from China is the main reason for Sri Lanka’s situation. In addition, the war economy, known as the war economy, has also become the main reason. The same reason applies to Pakistan. Because Pakistan is not clear on what matters should be given importance in the economy. When the government is under military supervision, the military The country’s economy will be compensatory,” he said.
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