Pakistan has receive a $700 million loan from China Development Bank, which will boost Pakistan’s foreign exchange reserves by 20%. The loan comes as Pakistan is struggling to hash out a deal with the International Monetary Fund (IMF) regarding the terms of its 2019 bailout.
Finance minister Ishaq Dar announced the development last week on the same day that the country’s National Assembly passed a money bill aimed at raising tax revenues to fulfill the demands set by the IMF for seeking a $1.1 billion loan facility to avoid an economic meltdown.
“This amount is expected to be received this week by State Bank of Pakistan which will shore up its forex reserves,” Dar tweeted.
However, as much as development looks in favour of Pakistan, the new loan from Beijing is likely to worsen its debt burden, which currently stands at around $100 billion.
Why China’s financial aid is likely to hurt Pakistan?
China is already Pakistan’s largest creditor, owning approximately 30% of its external debt. Additionally, China charges higher interest rates than other lenders, which adds to Pakistan’s debt servicing costs. Pakistani commercial banks are borrowing from Chinese banks at 5.5% to 6% interest, while other lenders offer funds at around 3%.
In the fiscal year 2021-2022, Pakistan paid around $150 million in interest to China for using a $4.5 billion Chinese trade finance facility. Therefore, the new loan from China will only add to Pakistan’s debt burden.
Now China is stringent in terms of recovering money. Beijing has been using its economic leverage to negotiate deals with Pakistan in the energy sector. In addition, China has used the compensation for the families of the engineers killed in the Dasu Dam terror attack as a bargaining chip to extract concessions from Pakistan.
While China’s hard bargaining may have short-term benefits for China, it may not be sustainable in the long run for Pakistan.
Will China funding push Pakistan towards Sri lanka-like financial crisis?
It is worth noting that China’s debt diplomacy has also hurt Sri Lanka in the past. Sri Lanka borrowed heavily from China to finance infrastructure projects such as ports, highways, and power plants. However, the country struggled to repay the loans, and China eventually took over control of the Hambantota Port on a 99-year lease. Critics have argued that China’s lending practices in Sri Lanka and other countries are part of its larger strategy to expand its economic and geopolitical influence.
Uzair Younus, director of the Pakistan Initiative at the Atlantic Council’s South Asia Center, told The Print that more borrowing from China could cause trouble ahead.
“The concerns about a Sri Lanka-type default are valid, given the liquidity crisis in Pakistan. But I think the Chinese are not going to move forward on a major project until broader macroeconomic risks are dealt with within Pakistan.”
Source: livemint
