Pakistan’s Costly Plunge into China Debt

Wherever China’s One Belt, One Road initiative goes, it appears that the Chinese lenders including the Bank of China – the government’s flagship bank – aren’t far behind, and that Beijing is using the financial power of the government-owned banks to its advantage, along with Chinese President Xi Jinping’s Asian International Investment Bank.

Chinese banks including the China Development Bank, the Export-Import Bank of China and others by the end of 2014 loaned almost as much money to developing countries as the next six lenders had together, including the World Bank, the Asian Development Bank and the Inter-American Development Bank, according to Boston University’s Global Economic Governance Initiative.

While obviously development loans are crucial for modernization and investment in developing countries, in some cases the terms are onerous and interest rates are steep. Nowhere is that clearer than in Pakistan, where the Bank of China began operations in the country just in the past week and where soaring developmental debt to China threatens the macro economy. .

While Pakistan has been receiving Chinese capital in the form of aid and loans for quite some time, the speed and scale have both increased in the wake of implementation of the China-Pakistan Economic Corridor, a collection of projects intended to modernize Pakistani infrastructure and strengthen its economy via construction of transport networks, energy projects and special economic zones whose cost has ballooned to US$62 billion.

The Asian International Investment Bank is a recent entrant in this regional game, recently sending sent a three-member delegation to Pakistan and expressing interest in financing energy projects. Pakistan told the delegation that the country needs almost US$55 billion for a complete overhaul of its almost cash-starved power sector, particularly its distribution and transmission systems.

While the AIIB is already a co-financier of the M-4 Gojra-Shorkot Motorway and the Tarbela-V Hydropower Project, its new plan for Pakistan is likely to take its financial presence in the country to an entirely new level, and with it China’s influence – a natural outcome of borrowing and an issue that Pakistan has yet to decide how to deal with.

There are already vivid examples of how China will have a dominant influence on the very structure of Pakistan’s economy. In fact a number of studies point to the way China uses its financial clout to “convince” weaker states to abide its own rules of the game.

For instance, in a 2016 issue of Routledge’s Asia Security Studies, which dealt with the question of China’s relations with peripheral states, examples have been provided whereby China uses its financial power to its advantage. The study points out that in 2011, China, much like any other country in any identical situation, used its financial power to impel the Pakistani government to use Chinese companies and labor for construction and to purchase all material and components from Chinese suppliers.

While Pakistan’s political elite has little to fear from the overwhelming presence of Chinese companies in Pakistan as their own business interests remain largely attached to London, for politicians the situation is directly hurting Pakistan’s domestic economy, leading to unemployment and the absence of any real transfer of skills from China to Pakistan. As one commentator aptly put it, the presence of both Chinese companies and labor in Pakistan’s different regions and cities is akin to creating “many mini-Chinas” in Pakistan.

The extent of this influence has been only increasing. Pakistan is willingly handing over all major projects to China. In 2014 China demanded that all mega power projects, including the Bhasha Dam, Gaddani and Lakhra coal plants, the Tarbela Extension project and many transmission lines be handed over without any international bidding process, and that Beijing would invest US$22 billion directly in Pakistan.

Pakistani officials were then reported to have said that the Chinese companies had refused to take part in international competitive bidding to get the contracts in the power sector, arguing if Pakistan wanted funding from Beijing for various projects, Beijing wanted the projects.

In this context, the talks with AIIB officials with regard to seeking the Bank of China’s “assistance” in construction of a US$7.4 billion Automatic Metering Infrastructure (AMI) for 21 million consumers is only an extension of what China has been seeking for last few years.

Not only does this Chinese dominance mean a strong Chinese grip on Pakistan’s economy, but also that very few economic opportunities will be available for Pakistanis themselves. It remains far from clear even how these projects will benefit Pakistan.

Pakistan media have reported that pilot projects for the automatic metering system in different areas have shown that the system might not even work in Pakistani conditions, developing faults due to high temperatures and inconsistent specifications. Pakistan’s distribution companies have opposed the installation and have been uncooperative with suppliers.

This is equally true of the potential for further damage that Chinese companies’ overwhelming presence through China-exclusive economic zones in the long run. Other benefits such as tax breaks also stand included in the offers that the Chinese companies have received. In April, Pakistan’s then-finance minister acknowledged that Chinese companies investing in the economic corridor would receive deep annual tax breaks, adding that these tax concessions had been given in lieu of China’s US$56 billion investment, unwittingly acknowledging the political influence of Chinese capital.

The Routledge study of China’s relations with peripheral states also notes that China’s dominance is likely to have a deleterious impact on Pakistan’s manufacturing and agricultural fields. Already, the study points out, Chinese exports to third party countries, which are expected to increase after the economic corridor becomes fully operational, have reduced the demand for made-in-Pakistan goods by 4 percent.

That is likely to hurt Pakistan further, especially in textiles, one of Pakistan’s biggest exports. The textile sector “has started fearing the stiff competition that is likely to come its way after the introduction of a 10-year textile development plan by China in its Xinjiang Uygur Autonomous Region. According to this plan, by 2023, Xinjiang will build China’s largest textile production base and the largest garment-export’s processing base. Based on the latest machinery, by 2023, Xinjiang will simply become the largest cotton textile industrial base of China and the most significant clothing export base in Western China.”

These exports are to be routed through the economic corridor, meaning Pakistan will be facilitating Chinese exports only to find out that its own exports have shrunk and gradually died out.

While Pakistan’s local industrialists have been arguing against the CPEC, little to no heed is being paid to their interests, given China’s ever-increasing financial influence and China’s ability to steer Pakistan to a path of growth that secures Chinese interests. It is therefore not surprising to see the Chinese shying away from creating Economic Zones in partnership with their Pakistani counterparts.

The emphasis, rather the insistence, remains on China exclusive zones. Pakistan is set to witness the beginning of ‘soft colonialism’ after 70 years of independence from the hard colonialism of the British Empire. Still, the CPEC remains a game changer—for China.

Salman Rafi Sheikh is a Pakistani academic and a regular contributor to Asia Sentinel