Pakistan’s Growing Dependency on China

Spearhead Analysis – 17.04.2018

By Shirin Naseer
Senior Research Analyst, Spearhead Research

For several years now, Chinese financial assistance has been an important source of support for Pakistan’s economy. China was Pakistan’s largest lender in the year 2017. Since then, Chinese support has only further intensified; according to reports, China recently offered commercial loans worth $1 billion to Pakistan. There are additional reports suggesting China and Pakistan are presently deliberating signing another deal of perhaps about the same estimated value. While these events may allow room for some optimism regarding the future of Pakistan’s economy, with the country’s recent inclusion in the Financial Action Task Force (FATF)’s grey-list (to take effect in June), there is perhaps a need to exercise some caution in increasing dependency on China.

Some analysts have argued that grey-listing could lead to a downgrade in Pakistan’s debt ratings, which may make it difficult for Pakistan to tap into international bond markets. Others have contested the idea that grey-listing could raise significant barriers to trade, saying Pakistan was on the FATF grey-list from 2012 to 2015– a time during which it successfully completed an IMF program and raised over $5 billion from international bond markets.

It is significant nonetheless to consider the possibility that re-inclusion in the FATF may exacerbate Pakistan’s ability to meet the already swelling debt on Pakistan’s economy from Chinese loans under President Xi Jinping’s flagship China-Pakistan Economic Corridor (CPEC) project. 

Beijing is committed to invest $60 billion in its CPEC project—which will be the largest investment in all of China’s Belt and Road Initiative (BRI). As the CPEC project materializes China is certainly to benefit from its investment with the increase in influence that CPEC will provide China across Eurasian economies and a series of infrastructure projects that will link China’s western provinces to the Arabian Sea. Pakistan on the other hand is also expected to profit from the building of power plants, roads, rail networks and a deep-water port under CPEC.

Several observers view CPEC as the answer to all of Pakistan’s economic problems. It is largely believed that Pakistan’s prospects will extensively improve in the near future if CPEC goes as planned. An advocacy group called the Pakistan Business Council estimated that over the next five years, projects under CPEC could amount to 20 per cent of Pakistan’s total GDP.

At the same time, some policymakers contest this idea, citing ways in which Chinese assistance may in fact spark trouble. One major cause for concern is the huge debt burden that Pakistan may end up bearing as a result of CPEC projects. In June last year, the Economist released a report that revealed about two-thirds of loans for the $28 billion of early projects were taken on commercial terms, at an interest of about 7 percent a year.

Last year IMF officials visited Pakistan to review Pakistan’s ability to repay its $6.1 billion outstanding loans to the fund. In a meeting with officials from the Ministry of Planning & Development and the Ministry of Finance, IMF officials “cautioned Pakistan to be mindful about the adverse implications of repayments of loans and profit repatriations to China”. Since it is unlikely for Pakistan to experience any major increase in exports in the near future, according to sources, IMF officials were “appalled” at the implications of CPEC projects.

Pakistan’s former finance minister, Hafeez Pasha too warned Pakistan may run out of foreign currency reserves by September—leading to a possible financial crisis in the country. According to Pasha, the only way to deal with a crisis of this nature would be with help from the IMF; he further warned however that with the shift in the US policy towards Pakistan, Pakistan should expect much tougher conditions than it is used to getting. Pasha remarked: “We may be told that CPEC’s size needs to be cut down”.

While many other countries receiving large sums from China under the BRI are also at risk of what is deemed “China’s debt-trap diplomacy”, stakes are particularly high in case of Pakistan, since with the Trump administration’s tough stance on Pakistan the country’s reliance on China is likely to expand drastically.

With increased dependency on Beijing, negotiating on terms of projects under the CPEC will undoubtedly become a lot more challenging for Islamabad. Chinese companies have been recorded as receiving major contracts under the CPEC project. In November, the Federal Minister for Ports and Shipping Mir Hasil Bizenjo revealed that 91 percent of revenues to be generated by the port of Gwadar will go to China. The usage of Chinese labor to complete projects has also not gone unnoticed by local observers. Several policy analysts have voiced their concerns regarding CPEC deals that may in actuality be exploitative, and largely in the favor of Chinese interests. The removal in November last year of the $14 billion Diamer-Bhasha Dam from China’s list of corridor projects has been one example of Chinese financial conditions proving too difficult for Pakistan to comply with.

Recently Pakistan Tehreek-e-Insaf (PTI)’s Murad Rass submitted a resolution in the Punjab Assembly demanding that the federal government stop the sale of Pakistani land to foreigners. “Our atomic assets and national security will be at risk if we continue selling our lands to foreigners,” he said. He asked the house to introduce the same legislation as in the United Arab Emirate (UAE) in relation to the sale of property. There is notable uneasiness concerning expanding Chinese influence and outreach in Pakistan.

In an attempt to diversify after America’s new Pakistan policy and rising concerns over Pakistan’s growing dependency on China, Islamabad has increased efforts to reach out to Russia for economic and even security assistance.

On April 10, a report by the Quawa Defense News & Analysis Group revealed the Pakistan Army Aviation Corps (PAAC) has begun receiving the Mi-35M attack helicopters ordered from Russia back in 2015. Russia officially handed over four Mi-35M helicopters to PAAC in August 2017. Brigadier General Waheed Mumtaz of Pakistan’s Defense Export Promotion Organization was quoted saying, “The contract was signed, we received all four cars [Mi-35Ms] and now we get new equipment”. The Pakistani military has expressed an interest in procuring an additional 20 Mi-35M helicopters in the coming years.

Not only are Pakistan and Russia looking to boost military cooperation, the two are also intent on negotiating more energy supply deals. Presently, an offshore gas pipeline is being considered, and plans for a $2 billion LNG pipeline linking Lahore with Karachi -which will be the first major Russian development in Pakistan for decades- are being finalized. According to reports, Moscow has also expressed a keen interest in building energy plants to convert natural gas into fuel products.