Ananth Krishnan BeijingJuly 8, 2018UPDATED: July 8, 2018 08:09 IST
Illustration by Nilanjan Das
Chinese and Pakistani officials often like to boast that their relations are "higher than the Himalayas, deeper than the oceans and sweeter than honey". Deeper than the oceans could soon capture the extent of Pakistan's growing financial debt to its 'all-weather' ally.
In June, China lent Pakistan $1 billion to arrest its plunging foreign exchange reserves, which have fallen under $10 billion, down from $16.4 billion a year ago.
Pakistan had earlier borrowed $6 billion from China, under the China Pakistan Economic Corridor (CPEC), a key part of China's Belt and Road Initiative (BRI). The $6 billion under CPEC has been lent at 2 per cent interest and Pakistan "will end up returning $7.4 billion over 20 years", China's deputy chief of mission in Islamabad, Zhao Lijian, said on June 29. Japan's concessional lending, by contrast, is usually offered at half a per cent.
With its diminishing reserves and struggling economy, it remains far from clear how Pakistan plans to repay this amount. Sri Lanka has struggled to repay Chinese loans offered at similar rates. When China lent around $300 million at a similar rate for the Hambantota airport, failure to repay the loans - with the airport and port failing to take off-led Colombo to go back to Beijing for further payments. The interest rates were raised to 6.3 per cent. Faced with no other alternative, Sri Lanka agreed. Fast forward five years, and the lease for the port had to be transferred to a Chinese company for 99 years with 85 per cent stake as the loans could not be repaid. In all, Sri Lanka today owes China around $8 billion.
Pakistan's debt could ultimately dwarf that. Besides the $7 billion from the Chinese government, Chinese companies had put in $13 billion under CPEC, estimated Zhao, mainly in the energy sector. This has been funded from Chinese commercial banks to Pakistani companies. The interest is almost certain to be higher than the 2 per cent offered by the government, and is likely to be in the 3-5 per cent range (or higher).
Zhao, however, rejected any concerns, saying that since "the Pakistani government is not borrowing a single dollar to complete these projects", there "is no responsibility on the Pakistani government to return the so-called debt or the commercial loans". "If somebody claims CPEC is a debt trap, remember to call them fake economists," he said.
What he left unsaid was what China - and its companies - would expect if these loans were left unpaid. At the very least, as in the case of Hambantota, vast amounts of Pakistani land and assets could be transferred to Chinese entities.
And Pakistan may not be the last such case. Both Nepal and Bangladesh are increasingly relying on Chinese financing for major infrastructure projects, the financial terms of which haven't always been made public. What is in China's favour is that governments haven't stopped turning to Beijing, in part because of the lack of alternatives and as governments in power are often more than happy to bequeath the consequences to their successors.
The next government in Islamabad, following July's elections, is unlikely to change course, even if it finds the deals it is inheriting with its closest ally are not as sweet as honey.