China and Pakistan have a “lips-and-teeth” friendship, as diplomats from Beijing are fond of saying. Some of that closeness has come from a surge in Chinese financial support. But might that relationship end up biting both parties as Pakistan runs out of funds to repay its debts?
Islamabad was already struggling to meet its commitments in its current fiscal year. The chances of making its repayments were worsened by flooding over the summer that killed 2,000 people and displaced millions more, bringing economic havoc.
The government turned back to its creditors to ask for another round of negotiations on a relief and restructuring plan. Yet although US Secretary of State Antony Blinken responded with a promise to support the flood relief effort, he indicated that Pakistan needed to sort out a restructuring of its debt to China, its single-largest creditor, before a wider deal could be addressed.
This triggered a swift reaction in Beijing, which is exasperated by allegations that it has loaded its partners in the developing world with unsustainable borrowing as part of a strategy of ‘debt-trap diplomacy’.
“Instead of passing unwarranted criticism against China-Pakistan cooperation, the US side might as well do something real and beneficial for the people of Pakistan,” the foreign ministry shot back.
Pakistan’s finance minister Ishaq Dar seemed to hear the message from Blinken, telling Reuters that he would be pursuing a rescheduling of $27 billion worth of non-Paris Club debt, most of it to China, although he would not be asking for haircuts as part of a deal.
The Chinese are now Pakistan’s largest creditor by some distance, with an increasing proportion of loans that come in the form of shorter-term lending to meet emergency needs rather than the longer-term loans that typically underpin infrastructure projects, says AidData, a research lab at William and Mary, a university in the United States.
Hence some of the Chinese frustration at being painted by third parties as an unsupportive partner, perhaps.
Yet the growing complaint from finance ministries in other countries is that the Chinese have refused to engage with debt negotiations under a Common Framework arrangement set up by the Group of 20 nations (G20) to bring a broader group of creditors together in restructuring efforts.
This is a major problem, critics say, as about 40% of the repayments due from the world’s poorest countries are owed to the Chinese.
“Really, the barrier to making greater progress is one important creditor country, namely China,” Janet Yellen, the US Treasury Secretary told reporters at a meeting of the IMF this month.
“It’s indispensable that we have them in the room and in the discussions when it comes to debt relief,” added Nadia Calvino, the Spanish finance minister, after the Chinese chose not to send representatives to the annual gatherings of the IMF and World Bank.
Pakistan Prime Minister Shehbaz Sharif is scheduled to visit Beijing early next month with reports in the Pakistani media that Islamabad is asking Beijing to roll over $6.3 billion in debt that is maturing in the next eight months, split about 50:50 between commercial lending and a loan due to the Chinese central bank. Although Chinese commercial loans are very rarely rolled over, they are sometimes refinanced, which requires the government to pay the maturing debt and then start anew with fresh loans.
Pakistan is a flagship partner for China’s Belt and Road Initiative (BRI) with billions of dollars of repayments ahead for construction work on power and transport projects in the China-Pakistan Economic Corridor. Some of its creditors have sounded warnings about the financial viability of the plan, including advice from the IMF that continued investment in similar projects could “pose a risk to debt sustainability”.
That doesn’t seem to have dimmed the enthusiasm of the Pakistani government for more collaboration with the Chinese, however: its ambassador to China has just announced that at least three new “corridor” projects are under consideration in the health, agricultural and digital technology sectors.
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