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HomeCHINA´S BELT & ROAD AND OTHER DEBT TRAPSChinese Loan Trap Made Pakistanis Struggle To Fuel Everyday Life

Chinese Loan Trap Made Pakistanis Struggle To Fuel Everyday Life

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After securing a $7 billion (€6.5 billion) bailout package from the International Monetary Fund (IMF) in July, cash-strapped Pakistan has initiated discussions with Beijing to renegotiate billions in Chinese debt while aiming to implement economic reforms.

Among the proposals on the table are deferring at least $16 billion in energy sector debt owed to China and extending the term of a $4 billion cash loan facility due to dwindling foreign exchange reserves.

Recently, Pakistani Finance Minister Muhammad Aurangzeb visited Beijing to present proposals for extending the repayment period for debt related to nine power plants built by Chinese firms under the multi-billion-dollar Pakistan-China Economic Corridor (CPEC).

On Friday, Prime Minister Shehbaz Sharif informed a federal cabinet meeting that he had sent a letter to the Chinese government requesting debt reprofiling, as reported by Pakistan’s Dawn newspaper.

Debt reprofiling differs from debt restructuring in that it extends the repayment deadline without reducing the principal amount.

Islamabad faces significant pressure to renegotiate costly agreements with power producers, mainly Chinese companies, in an effort to lower electricity prices.

Since its inception in 2015 as a key part of China’s Belt and Road Initiative (BRI), CPEC has seen China invest billions of dollars in infrastructure development in Pakistan.

CPEC projects are valued at $65 billion, primarily aimed at creating a shipping route for Chinese goods from Gwadar port on the Arabian Sea to China’s Xinjiang region.

The impact on daily life in Pakistan has been significant, with energy production being a central concern.

CPEC has directed billions toward energy infrastructure development in Pakistan.

Azeem Khalid, an expert on Chinese investments in Pakistan, noted that the development of China-funded power plants has worsened Pakistan’s economic struggles.

“Instead of setting up government-owned power plants, Pakistan allowed Chinese firms to operate as Independent Power Producers (IPPs), leading to capacity payments even when production is not utilized. This results in the population paying for electricity they don’t consume,” Khalid explained.

Overburdened by Chinese loans, Pakistan had accumulated $26.6 billion (€24.6 billion) in Chinese debt by 2022, the highest of any country globally.

Economist Safiya Aftab from Islamabad highlighted that the interest rates on Chinese loans are not concessional, averaging around 3.7%.

“These loans were given for infrastructure, which in theory is supposed to start generating returns. The main issue in my opinion is Pakistan’s poor absorption capacity. The government was not able to progress on projects according to schedule,” she said.

Analyst Khalid believes these loans “are challenging to repay due to exorbitantly high interest rates, which exceed the payment capacity of the government.”

“The more relaxations and extensions available, the better it is for Pakistan. China, aware of Pakistan’s financial struggles, often provides breathing space but occasionally leverages this debt for its interests,” said Khalid.

Analysts argue that CPEC has been detrimental to Pakistan. They point out that while CPEC loans were initially marketed as the most affordable international financing option, it later became clear that repaying them would be significantly more costly than anticipated.

“The agreements, heavily favoring China, were poorly negotiated, resulting in the project being over-promised and under-delivered. The public and media were misled by the then minister of planning and his team to portray CPEC as a significant economic game-changer for Pakistan and the region,” Khalid said.

Economist Kaiser Bengali believes that altering the payment structure for Chinese debt is merely a short-term solution, contingent on the goodwill of the Chinese government. Although re-profiling and rolling over loans from China have assisted Pakistan in meeting its external financing requirements in the past, these measures are not a permanent fix.

“The Chinese debt is huge and rollover is the only but temporary option. “The huge debt pile is crushing the economy,” he said.

“This is getting more complex, for how long China will roll over these debts, as they have their own bottom lines for these loans in their business projects. They lend to many countries and don’t want to set a precedent of delaying and renegotiating projects as it will affect their interests,” he added.

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