By Manzoor Ahmed
The heavy investment in Pakistan by the China is a subject of speculations and predictions within economic circles. The talk that the Bamboo Capitalist, China, is making Pakistan its colony with the multi-billion dollar economic corridor from Gwadar, a sleepy fishermen village on the Arabian coast to Kashgar,the oasis city in Xinjiang,refuses to die down. Every denial from official quarters in Islamabad, and Beijing is met by a new assertion to the contrary with some facts and some more compelling arguments. The sub-text of every argument is the same that cooperation with China will become much less voluntary “if things go along the current trajectory”.
On May 22, for instance, a blog post on The Express Tribune (ET) asked rhetorically: “Is China making Pakistan a client-state with its ‘debt-book diplomacy’?” The authors, Azeem Ibrahim and Ali Zaagoug replied in the affirmative. “When China will come in and ask for concessions, Pakistan will have no choice but to acquiesce”, they declared.”
The blog admits that today in Pakistan, China is the most active and positive economic force. So much so continued cooperation between the two countries is supported by virtually all sides. “From the Taliban to the secularist military leaders view Chinese investment as a boon to the country, the main source of job creation, and, in all truth, the most promising source of kickbacks for themselves”. Taken up under China’s One Belt One Road (OBOR) initiative, China Pakistan Economic Corridor (CPEC) and ancillary ventures are the most significant development stimulus Pakistan needs to shed its tag of failing state. It will have “a significant upsides for the people themselves, not just a handful of corrupt officials”.
Why China has undertaken the venture? Is it out of goodwill or self-interest? The ET blog fields these questions. And comes up with a two-fold response. Both economic and geopolitical considerations have pump primed the Chinese action, the blog writers aver unhesitatingly, and make it clear that China is not spending its Yuans for the heck of it. Undoubtedly, China is not cut in the good old Soviet Union mode, which used to subsidise the day-to-day living conditions in the satellite Communist countries for the sake of Communism.
“…it must also be acknowledged that China is not doing this (investments in Pakistan) out of the goodness of their heart”, Azeem and Ali say and elaborate thus:
“One aspect of this is quite uncontroversial: the strategic rival of China in Asia is India, which historically opposes Pakistan, so it makes sense to both China and Pakistan that they should align themselves geopolitically. The investments along the Indus River both strengthen Pakistan and entrench the country firmly in the Chinese sphere of influence, much to the perceived benefit of both parties.
“What is less well-advertised are the terms of the cooperation, and the costs. Many of the infrastructure projects are financed through debt. They are Chinese projects built for China’s geopolitical and economic advantage, but they will be ostensibly owned by the Pakistani state, so the Pakistani state will pay for them – with loans from China”.
Consider these figures. By June 2019, Pakistan will owe Beijing $19 billion. But the interest rate on these loans average an astronomical 7% per annum, payable over 25-40 years. The cost of servicing this debt will average $7 to 8 billion per year, for the next 43 years. It will works out to between 0.5 to 1% of Pakistan’s Gross Domestic Product (GDP).
Why Pakistan is becoming increasingly dependent on Chinese loans?
Well, it is because the normal financial channels for sovereign debt will not extend such loans.”No western investor would expect Pakistan to be able to pay off these kinds of debts on these kinds of terms”. The ET blog authors argue that even the Chinese do not expect. “Well, nor does China. But that is not an issue. In fact, that is the point”, they say. The Chinese debt book diplomacy today covers 17 countries, Pakistan including. Whether in South-east Asia or the Pacific Region, or in South Asia (barring India), China has been extending loans on unsustainable terms. What will happen when things come to a head? “Beijing will extend payment terms, or underwrite those parts of the debt which the debtor countries cannot afford – provided the local governments understand Beijing’s point of view on this issue of infrastructure, or that issue of geopolitical alignment, and so on”, Azeem Ibrahim and Ali write.
If the Chinese client -states try to wriggle free? It will prove to be a misadventure. And huge sovereign debt would stare at them. Its consequences will bring nightmares. The ET blog gives this message bluntly. Should they try to wriggle free of Chinese impositions, “they will most likely be confronted by the prospect of sovereign debt default. This would make any further economic development virtually impossible, and severely undermine their political stability in a region which is already volatile enough”.
Pakistan and China have been ‘iron friends’ for several decades, and have cemented their friendship with CPEC. China has been lending money to Pakistan to overcome its fiscal crisis and forex crunch. In April this year the all-weather friend advanced $ 1 billion through its banks on “good, competitive rates”, according to the State Bank of Pakistan governor Tariq Bajwa. This is in addition to almost $1.2 billion borrowed from Chinese banks since April, 2017. More loans are in the works.
For now, all this serves the interests of Pakistan, and its decision-makers in Islamabad, the Federal capital, and Rawalpindi, the nearby garrison town that hosts the country’s powerful military.
What will happen when chips are down? History will repeat. On their part the ET blog authors are convinced that “when China will come in and ask for concessions, Pakistan will have no choice but to acquiesce.” When that happens, who will pay the price? As always, it will be paid by the average citizen “not by the political elite”.