Pakistan may fall into debt trap, country heading towards default; Shaukat Tarin

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Islamabad’s already fragile economy suffered another setback when recently China demanded repayment by Nov 2023, of $55.6M for Lahore Orange Line Project, reports ‘Osservatorio Globalizzazione’

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“Govt may compromise its strategic interests which is dangerous”; Shaukat Tarin

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ISLAMABAD: Pakistan may fall into a debt trap like Sri Lanka owing to its economic ties with China. Pakistan’s already fragile economy suffered another setback when recently China demanded repayment, by November 2023, of USD 55.6 million for the Lahore Orange Line Project, an Italian publication, Osservatorio Globalizzazione reported.

Meanwhile, at the end of March, the foreign exchange reserves held by the State Bank of Pakistan fell by a massive USD 2.915 billion, due to the repayment of external debt. Thus, Pakistan faces a bleak economic future in as far as relations with China are concerned.
The Chinese company, China-Railway North Industries Corporation (CR-NORINCO) which completed the Lahore Orange Line Project in 2020 has demanded from the Punjab Mass Transit Authority, an outstanding sum of USD 45.3 million by the end of March 2023 and the remaining outstanding USD 10.5 million by the end of the year. CR-NORINCO has insisted that all dues be repaid before the expiry of the contract on 16 November 2023, Osservatorio Globalizzazione reported.

China has made a hard bargain with Pakistan when it comes to paybacks on its loans and other investments in Pakistan. In the fiscal year 2021-2022, Pakistan paid around USD 150 million towards interest to China for using a USD 4.5 billion Chinese trade finance facility. In the financial year 2019-2020, Pakistan paid USD 120 million towards interest on a USD 3 billion loan.
The Chinese demand for the Lahore Line payment was made in the first week of April 2022 when the new political dispensation under PM Shahbaz Sharif had just stepped into office. Earlier, at the beginning of March 2022, China acceded to Pakistan’s request to roll over a whopping USD 4.2 billion debt repayment to provide a major relief for its all-weather ally.
China has been quite stringent in recovering money from Pakistan. Take Pakistan’s energy sector for instance, where Chinese investors have repeatedly insisted on resolving issues relating to existing project sponsors in order to attract fresh investment. Some Chinese projects in Pakistan are facing problems in securing insurance for their loans in China due to Pakistan’s massive energy sector circular debt of about USD 14 billion, Osservatorio Globalizzazione reported.
Pakistan has to pay around USD 1.3 billion to Chinese power producers and so far only USD 280 million has been paid. Another example of hard bargaining by China over monetary dealings vis-a-vis Pakistan is well documented in the case of the Dasu Dam Project.

Last year, China demanded USD 38 million towards compensation for the families of 36 engineers who had died in the Dasu Dam terror attack. Compensation was made a precondition for the resumption of work on the project. To placate China, Pakistan subsequently agreed to pay USD 11.6 million as compensation.
Pakistan’s fundamental challenge is that its economy is sinking and needs an infusion of funds to survive. While China is heavily responsible for Pakistan’s debt problem, it is the mishandling of Pakistan’s economy by successive governments that have led to the current impasse.
Extensive loans taken from China, Saudi Arabia and Qatar as well as 13 loans from the IMF over 30 years (with most loan programmes called off mid-way for failure to fulfil loan conditions), are a major cause of the economic downturn. The 2019 USD 6 billion IMF loan is also on hold, and China has dealt with Pakistan’s frequent requests to help, Osservatorio Globalizzazione reported.
Pakistan on its part is not shy about playing the loan addict. This strategy has not paid dividends and is only making Pakistan sink deeper into debt. Pakistan must be closely watching developments in Sri Lanka, for it could be the next nation to face the consequences of bad economic policies and heavy debt burdens. (ANI)

Pakistan heading towards default, warns Tarin

Former finance minister Shaukat Tarin said on Thursday the country is heading towards default, which may compromise its strategic interests.

Speaking to reporters at the Karachi Press Club, the PTI senator said the Sensitive Price Index — which measures the average change in the prices of most essential goods — is likely to hit 35-40 per cent “within the next few weeks”. His prediction for headline inflation, which measures the change in the prices of a bigger basket of consumer goods, was 25-30pc for the coming months.

“They’re crushing the middle class. They’re rolling back welfare schemes like Sehat Cards and Kamyab Jawan programme. They’re headmasters of the University of the Incompetent,” he said.

Mr Tarin dedicated a large part of his press briefing to the energy crisis that’s causing up to eight hours of loadshedding in urban centres and 12 hours of outages in rural areas.

Contrary to the claims of the coalition government, he insisted there was zero generation shortfall on April 30. However, the “imported government” failed to account for rising power demand and didn’t order fuel on time, he said. As a result, nationwide loadshedding reached 7,500-8,000 megawatts in June with a generation shortfall of 5,277MW.

“If we were in government, we’d arrange the funds and avoid loadshedding at all costs. But their thinking is to save money by simply not purchasing fuel. They don’t care about the people suffering endless hours of loadshedding.”

He said textile exports in July will drop by $1 billion. Small and medium-size enterprises will suffer even more once the latest hike takes the benchmark interest rate to the 13-year high of 15pc. “Textiles, autos and mobile manufacturing are bearing the brunt of the government’s incompetence,” he said.

Mr Tarin held capacity payments — money the government pays to electricity producers regardless of their actual output — partly responsible for the poor cash flow management in the power sector. These payments will rise to Rs1.4 trillion this year, even though large chunks of the installed capacity will remain idle because of expensive fuel that must be imported to run these plants.

He said the government is borrowing from banks at interest rates that’re 1.5-2pc higher than the benchmark, which is increasing the overall cost of credit in the economy.

He accused the government of looking the other way while speculators in the currency market — namely banks, exchange companies and exporters — play havoc with the exchange rate.

Responding to a question, the former finance minister said he didn’t collect the petroleum levy on an incremental basis despite committing to it with the International Monetary Fund (IMF). “The IMF’s concern was revenue collection, which we did without the levy,” he said, noting that its imposition to the tune of Rs50 per litre by the coalition government will “break the back of the nation”.

If the PTI was in power, Mr Tarin said, his first move to arrest the galloping inflation would be to procure Russian oil or even finished products at cheaper rates. Insisting that Cnergyico and Attock refineries are capable of processing Russian crude, he said cargoes can always be swapped with other players in the global energy market.

He said his government would’ve extended a petrol subsidy for motorcycle users and tried to broaden the tax base to pay for it.