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Will Beijing Heed Pakistan’s Request for Loans?

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Will Beijing Heed Pakistan’s Request for Loans?

Their friendship may be doing well rhetorically, but Islamabad’s reliance on Chinese money is creating complications for Pakistan.

Will Beijing Heed Pakistan’s Request for Loans?

Khunjerab Pass at 16,000 feet in the Karakoram Mountains on the northern border of the Pakistani region of Gilgit–Baltistan, September 21, 2016.

Credit: Wikimedia Commons/Rohaan Ali Bhatti

Prime Minister Imran Khan’s upcoming visit to China on February 3-5 will largely focus on seeking more financial help to support Pakistan’s economy. However, financial dealings between the two countries have become increasingly complicated due to Pakistan’s diminishing foreign reserves and inability to return loans taken in the past.

This suggests that the Pakistani prime minister will not get substantial funds from Beijing unless previous budgetary issues between the two countries get addressed.

The Pakistani leadership has sought to pitch the trip as an example of the support the two countries extend each other in difficult times. In an interview with Chinese journalists in Islamabad last week, Khan said that the West’s criticism of Beijing regarding the treatment of Uyghurs in Xinjiang was unfounded, as the situation on the ground doesn’t show any ill-treatment. He went on to say that the West’s criticism of China over the Uyghur issue is reflective of its selective policy, which does not call out New Delhi for its alleged human rights violations in Indian administrated Kashmir.

Meanwhile, Pakistan’s Foreign Minister Shah Mahmood Qureshi said that the key objective of Khan’s visit to China was to attend the Beijing Winter Olympics and express solidarity with Beijing as several countries have called for a diplomatic boycott of the Games.

In a separate statement, the Pakistani Foreign Office said that the visit will reinforce the “All Weather Strategic Cooperation Partnership” and advance the objective of building a closer China-Pakistan community.

However, beyond rhetoric and solidarity calls, the trip’s agenda shows that Pakistan’s economic and diplomatic reliance on China continues to grow.

Khan is likely to ask for $3 billion in loans from China to stabilize the country’s falling foreign reserves. Reportedly, China has already placed $11 billion with Pakistan in the form of commercial loans and foreign exchange reserves. These loans are part of Pakistan’s current official foreign exchange reserves that stand at around $16.1 billion.

Moreover, Pakistan is also expected to pitch around six priority sectors including textiles, footwear, pharmaceuticals, furniture, and agriculture for their competitiveness to attract Chinese businesses.

It is unlikely that Chinese will inject substantial financial support unless the existing budgetary issues over previous investments are resolved. For some time now, Chinese investors in Pakistan’s energy sector have repeatedly asked Islamabad to resolve issues of existing project sponsors in order to attract fresh investment. A number of these projects are stuck in a circular trap in Pakistan. For instance, some Chinese projects in Pakistan are facing problems in securing insurance of their loans back home due to Pakistan’s massive energy sector circular debt of about $14 billion. Roughly, Pakistan has to pay around $1.3 billion to Chinese power producers and so far only $280 million has been paid.

The subject will surely be on the Chinese leadership’s agenda this week. Beijing has driven a hard bargain with Islamabad when it comes to paybacks on its loans and other investments in Pakistan. In the outgoing fiscal year, Pakistan paid around $150 million in interest to China for using a $4.5 billion Chinese trade finance facility. In financial year 2019-20, Pakistan paid $120 million in interest on use of a $3 billion facility.

Another example of Chinese hard bargain policy over monetary dealings vis-à-vis Pakistan is well documented in the case of Dasu Dam Project. Last year, China demanded $38 million in compensation for the families of engineers who died in the Dasu Dam terror attack. Reportedly, Beijing made the compensation a precondition for the resumption of work on the project. To placate Beijing, Pakistan has agreed to pay $11.6 million in compensation to the 36 Chinese nationals working on the project.

Arguably, Pakistan’s existing foreign currency reserves have largely been built through borrowing. A majority of these foreign reserves are there due to Chinese loans. Pakistan’s reserves fell sharply over $1.5 billion in the first three weeks of January 2022. The reserves have fallen below the $23 billion mark mainly due to massive external debt servicing. It is important to mention here that in December 2021, Pakistan received a loan of $3 billion, which the country has already consumed.

These dealings reflect that Khan’s push to win more funds during his upcoming visit to China will not be easy. And if he manages to get more funds, it will add to the country’s debt stock and service obligations. This has been the case in the past. Last year, Pakistan took around $3 billion from China to return the same amount owed to Saudi Arabia.

At the moment, Pakistan is eyeing to revive the $6 billion loan program with the International Monetary Fund (IMF) to support its foreign exchange reserves. However, at this point Pakistan’s case at the IMF remains uncertain.

Pakistan and China’s “all weather friendship” may be doing well rhetorically, but Islamabad’s all out reliance on Chinese money to manage its economic woes is not working out well.