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Friend with no benefits: Why China is not Pakistan's pal at all

Under the guise of 'Long live Pak-China friendship', Beijing is simply looting Islamabad.

 |  12-minute read |   22-10-2018
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Pakistan and China define their friendship as “higher than the heights of Himalayas and deeper than the depths of Arabian Sea”. To make it even stronger, President Xi Jinping of China visited Pakistan in April 2015, with a multi-billion dollar investment plan (nay debt-trap) — the China Pakistan Economic Corridor (CPEC), the main plank of Xi’s Belt and Road Initiative (BRI).

China has always defined BRI as a win-win situation, implying that both China and the host country would enjoy the resultant economic prosperity. The truth, however, is completely different. Basically, “win-win” probably meant that China would “win twice”. Unfortunately, the CPEC has burdened Pakistan’s economy with a lot of debt and trade deficit, and pushed the country onto the brink of total bankruptcy. Neither did China provide Pakistan with industrial technology to help it boost exports, nor did it create jobs in the country — because the project has mostly hired Chinese labourers.

cpec_102118023658.jpgJust how much will Pakistan end up owing 'good friend' China after the completion of CPEC? Almost 62 billion dollars! (Photo: Reuters)

In short, under the guise of “Long live Pak-China friendship”, Beijing is looting Islamabad.

It was the burden of Chinese debt that forced Sri Lanka to hand over its Hambantota port to China and a massive piece of land in Colombo to Chinese multinational corporations, in return for debt relief. The fear of debt-trap pushed Malaysian Prime Minister Mahathir Mohamad to halt the contract for China Communications Construction Company to build the East Coast Rail Link, thought to have cost the government around $20 billion, along with a $2.5 billion agreement for an arm of a Chinese energy giant to construct gas pipelines. He had earlier suspended the projects, leading some analysts to believe that he wanted to renegotiate the terms during his China trip.

Story of a so-called friend

Honestly, you can’t call a country your friend when it forces you to buy its equipment and material to be used in its projects — a port, coal-fired power plants, roads and railways (the CPEC). And when this exercise severely shreds your dollar reserves and when you end up with few billions in national exchequer, this so-called friend offers a helping hand in the form of billion-dollar debts — so that you can keep importing from her!

Ultimately, you find yourself in the middle of nowhere. Your people suffer; you arrange a funeral ceremony of your economy with just enough foreign reserves that you can barely afford imports of two months. Then the so-called friend offers you some more debt, so that you can buy necessary goods (or otherwise, your citizens will starve).

You say thanks to your so-called friend and move on in your life. Suddenly, you see your economy standing on the brink of an ultimate collapse. You knock your so-called friend’s door for help, but this time, you face a blatant “no”. Why? Because your so-called friend wants to improve its image in the eyes of the world powers — as they think that your so-called friend is using you like a tissue paper. Hopelessly, you ask an international bank (the IMF) which offers you some help on condition that you will have to make the economic deals with your so-called friend public. When that so-called friend becomes aware of the bank's (IMF) conditions, it warns you, saying that the loan from the bank (IMF) should not affect our “so-called friendship.”

The curse of Xi Jinping’s “Debt-trap diplomacy”

China has always been accused by the West of leveraging huge loans it holds over less developed economies across the world, in order to snatch their key assets and increase its military intervention.

From Pakistan to Montenegro, to Laos to Kyrgyzstan — many nations owe huge debts to China. Let us take the example of Sri Lanka. It owed more than $1 billion in debts to China and unfortunately wasn’t able to service it; China reportedly forced it to hand over Hambantota Port on lease for 99 years. In April 2018, China approached Vanuatu to set up a military base, which owed her approximately $250 million. Tonga also carries some big debts and is facing difficulties in servicing them. The Prime Minister of Tonga Akilisi Pohiva in August 2018 showed his concerns over China’s debt-trap diplomacy, saying that it is preparing to seize assets from his country.

So, how much will Pakistan end up owing China after the completion of CPEC? You won’t believe it — almost $62 billion dollars!

I don’t know what China is up to, but the situation seems alarming. China forces Pakistan to buy Chinese equipment for use in Chinese projects, shredding its reserves; then, it extends Pakistan loans to cover the purchases, which increases the burden of debt on Pakistan’s economy. Machinery imports alone from China in the first two years of the CPEC raised Pakistan's current-account deficit by 50 per cent.

xi_102118023714.jpgXi Jinping Smile: From Pakistan to Montenegro, Laos to Kyrgyzstan, many nations owe huge debt to China. (Photo: Reuters)

Now Pakistan is facing a severe foreign currency shortfall, especially the US dollar holdings of its central bank, which have dropped to $8.4 billion, barely enough to pay for two months of imports. The trade deficit is sky-rocketing; in the fiscal year which ended last June, exports were $23.22 billion while imports exceeded $60 billion. Indeed, its public sector debt stands at $75.3 billion — 27 per cent of Pakistan's gross domestic product.

Islamabad needed an urgent cash injection for its suffering economy, for imports and clearing debts. It is not that Pakistan didn’t ask China or Saudi Arabia to bail it out. Even Saudi Arabia agreed to invest in the China Pakistan Economic Corridor in the form of an oil refinery in Gwadar, but China had concerns, as Saudi Arabia is a major non-NATO ally of the United States and any involvement of the Saudis in CPEC would indirectly mean allowing US intervention. Economic deals between Beijing and Islamabad related to multi-billion dollar “debt-trap” or CPEC have been kept behind an opaque sheet of “we trust each other” from day one.

The United States, on every occasion, has put allegations on China of predatory lending practices and ruining small economies. In my opinion, China had to portray itself as “sincere and unselfish” and therefore, it was a blatant "no" from Xi for another bailout for Pakistan. Or, it may also be that Imran Khan’s government is aware of the dark realities of China’s Belt and Road Initiative.

Coming out of a fool’s paradise

As The News reported on October 1, 2018, Pakistan Railway Minister Sheikh Rashid said the estimated cost of expansion and reconstruction of ML-1 [Main Line-I that runs from Peshawar to Karachi] track under the CPEC has been brought down to $6.2 billion from $8.2 billion. “Pakistan is a poor country that cannot afford huge burden of the loans,” Rashid told a news conference in Lahore. “Therefore, we have reduced the loan from China under CPEC for rail projects from $8.2 billion to $6.2 billion,” he added.

Remember that Financial Times report?

“The previous government did a bad job negotiating with China on CPEC — they didn’t do their homework correctly and didn’t negotiate correctly so they gave away a lot,” Abdul Razak Dawood, Pakistani cabinet member responsible for commerce, textiles, industry and investment told Financial Times.

“I think we should put everything on hold for a year so we can get our act together,” he added.

“Chinese companies received tax breaks, many breaks, and have an undue advantage in Pakistan; this is one of the things we’re looking at because it’s not fair that Pakistan companies should be disadvantaged,” he said.

What Dawood said clearly shows that Khan’s government is sceptical about China’s intentions behind pouring billions of dollars into Pakistan.

Between China’s “Dhamki" and IMF’s conditions

Imran Khan is known for the slogans he raised during his election campaign; that if Pakistanis would give him a chance to form the government, he would break the country’s addiction to begging from the West for dollars whenever it finds itself in a financial crisis. On October 8, 2018, Khan forgot his tall claims and allowed his Finance Minister Asad Umar to announce that Pakistan would seek a hefty loan from the IMF. It will be the country's 13th bailout from the IMF since the 1980s.

Pakistan right now is seeking its largest bailout package — $8-$12 billion — from the IMF.

And for sure, it will face strict conditionalities from the fund. It may force the Khan-led government to privatise steel mills and Pakistan International Airlines. And this would result in tens of thousands of jobs being lost, which will come with country-wide protests against the Pakistan Tehreek-e-Insaf. Before the announcement, the dollar in Pakistan was trading at 125 rupees to $1 — after that, the rupee has been devalued to 135 per US dollar.

immu_102118023736.jpgPakistan is now seeking its largest bailout package — $8-$12 billion — from the IMF. (Photo: Reuters)

The rupee's depreciation has increased Pakistan’s debt by $6.75 billion, thus contributing to some more economic woes for the nation. Just after Asad Umar announced the government’s decision to seek a bailout package from the IMF on the night of October 8 came the substantial single-day stock-market loss by more than 1,300 points — losing almost 270 billion rupees ($2 billion) of its capitalisation.

The government has failed to restore investor confidence and thus, the selling spree continued.

As a result, the index dropped below 37,000 points. The IMF’s projection that the inflation rate might hit 14 per cent by June 2019 further intensified the situation.

And there is yet another huge burden on the shoulders of Imran Khan and his cabinet — to disclose the nature, size and terms of the debt that Pakistan is bearing. Christine Lagarde, Managing Director, IMF, clearly said that the fund will expect “absolute transparency about the nature, size, and terms of the debt that is bearing on a particular country”, and although she did not explicitly mention China in her remarks, they were given directly in response to a question about Pakistan’s stockpile of Chinese debt. The transparency must extend to “the extent and composition of that debt,” she added, regarding whether it was government-owned or by state-owned enterprises “or the like of it”, which presumably means it also includes private-sector debt.

If Pakistan gives access to all the hidden information related to CPEC deals to the IMF, it will end up hurting its fair weather friend, China. Till today, the State Bank of Pakistan is not aware of the CPEC deals and therefore, it compiles its own debt sustainability forecasts on the basis of all the incomplete information available.

A rule of thumb is: You won’t hide good things.

No one knows what China and Pakistan have possibly agreed on. 

What Chinese Foreign Ministry spokesperson Lu Kang said at his press briefing in Beijing was shocking. On one hand, he endorsed Pakistan’s request to the IMF for financial assistance, but cautioned that the facility should not affect economic cooperation between Islamabad and Beijing, as Dawn reported.

Like a good friend of Pakistan, Mr Kang could have endorsed the help which IMF is offering to Pakistan — but the so-called 'friend' cautioned Islamabad that the facility should not affect economic cooperation between the two countries. Already Pakistan’s stock exchange is suffering — and this statement will contribute to investor confidence being lost from the market, as it would make investors more sceptical about the possible consequences of Pakistan disclosing the hidden deals of CPEC.

cpec-_102118023606.jpgWhose port is it anyway? What will be the ultimate fate of Gwadar? (Photo: Indiatoday.in)

Friends don’t threaten each other and China will have to understand that.

China should at least offer a helping hand to Pakistan in its truest sense. Rather than enmeshing it in a debt-trap, it should invest in Pakistan’s magnificent renewable energy potential, like financing solar power plants in Balochistan and Sindh, so that the country can cut down expenses on crude oil import for electricity. And it should help the country boost its exports by providing it with advanced industrial machinery and technology, so that the country can obtain comparative advantage in the production of some high-valued items.

There is nothing wrong in taking help from a “friendly” nation for the sake of energy and transport sector development, but as the world works on the theory of realism and capitalism, there is nothing like a free lunch.

China is securing its interests in the multibillion-dollar CPEC — and currently even enjoying Pakistan’s piece of the cake.

Only after Pakistan will begin to export more, will it be able to acquire sufficient dollar reserves to fulfill its demands of energy and infrastructure on its own. Substantial macroeconomic changes have to be made so that it can produce, consume, save, expand and export efficiently. Investment on research and development is needed. Barriers to enter and exit markets must be reduced. It will have to ask other countries (and not just friends) to make investments in its market. If the country properly explores its renewable energy potential, believe me, we won’t need coal, gas or petroleum fuelled power plants for our energy requirements.

What the US State Department says

Asked at a news briefing last Thursday how the US would deal with Pakistan’s request for a bailout, State Department spokeswoman Heather Nauert said: “In all cases, we examine that closely from all angles of it, including Pakistan’s debt position, in evaluating any type of loan program.”

Nauert also blamed Pakistan’s loan arrangement with China for the country’s economic woes.“I think part of the reason that Pakistan found itself in this situation is Chinese debt and the fact that there is debt that governments have incurred that they may be thought wouldn’t be so tough to bail themselves out of, but has become increasingly tough,” she said.

The million dollar questions now are — how China will react to Pakistan disclosing the secret CPEC deals? How western media will report the findings? What the superpower USA will do? And what will be the ultimate fate of Gwadar Port?

Also read: Pakistan's cheesonomics: Economic Advisory Council needs to stop thinking outside the box

Writer

Ali Salman Andani Ali Salman Andani @an_alisalman

The writer is a columnist and blogger. His analysis on economic, political, social, cultural and environmental issues frequently get published in Asia Times, DailyO, Modern Diplomacy and other publications

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