There is no surprise in the fact that China is the biggest lender to Pakistan, including both public and private debt. The real story is the amount of debt Pakistan owes China. There is no clear data set that explicitly states Chinese loans to Pakistan. An estimate is that around $19-20 billion out of $90 billion total debt and liabilities of Pakistan is Chinese i.e. over one fifth of the overall debt.
Is it a case of putting too many eggs in one basket? How would the Chinese deal if Pakistan is unable to repay. Before delving into that let us dissect how the figure reaches $19-20 billion.
According to the SBP annual report, China bilateral debt to government stood at $7.2 billion by Jun17. Mind you, this has increased by over $3 billion (from $4bn in Jun13) in the last four years. And now, China has surpassed Japan to become the single biggest bilateral lender to Government of Pakistan.
Apart from bilateral debt, Pakistan currency swaps (which only exits with China) in Jun17 stood at $1.5 billion (according to SBP annual report) which brings the debt toll to $8.7 billion. The central bank safe deposit stood at $0.7 billion which is most likely provided by none other than China. That takes the total number to $9.4 billion.
Let us delve into the not-so-public numbers. To start with, ICBC Pakistan branch, has taken debt of $2.7 billion from the parent company by June 17. They brought the dollars in Pakistan and have done swap to run the operations in rupees. This takes the loan amount to $12.1 billion.
China also happens to be the biggest lender to the private sector as well. There is no direct number to reach the Chinese loan to Pakistan private sector; but virtually all the increase in the last three years has come from China. The total private sector external loan increased from $3 billion in Jun15 to $7.2 billion in Dec17. This is an unprecedented growth and mostly came in terms of IPPs’ financing under CPEC and other projects. A reasonable estimate is that out of $4.2 billion increase in last 30 months, $3.5 billion is from China.
In addition to this, the debt liabilities to direct investors stood at $3.5 billion. This amount is loaned to foreign investors operating in Pakistan. The biggest investment by a foreign company in the last few years is from China Mobile and by a conservative estimate; $1.5 billion is the loan to China Mobile. Adding $1.5 billion to $15.6 billion takes the toll to $17.1 billion.
Now most of these numbers are based on June 2017 and Pakistan’s total external debt and liabilities increased from $83.1 billion then to $88.9 billion by Dec17. The debt has rapidly increased by $5.8 billion in the last six months and is still growing. The news items suggest that government incremental debt by China this year so far is $1.6 billion.
It is safe to estimate that Chinese liabilities have reached $19 billion. The need to raise further debt today is pressing for the economy to continue the growth path. Currently, western multilaterals and others are tightening hands on Pakistan because of falling import cover. The ball is well and truly in the Chinese court.
In order to continue the growth momentum, Chinese loans are imperative. But going back to the IMF is also inevitable which will surely hurt the growth momentum. Based on the above calculation, roughly speaking, $10 billion debt is CPEC related funding and $3-4 billion came as FDI under CPEC. This is mere one fourth of the total CPEC commitments and both Chinese investment and loans are bound to increase in next five years. It is a no-brainer to say that Pakistan’s debt fueled growth is not sustainable and the country would find it really difficult to repay the loans.
What would the Chinese do, should Pakistan default? Let’s see what China did to other countries in the past.
According to Center for Global Development, in 2011, Tajikistan wrote off an unknown amount of loan owed to China in exchange of 1,158 square kilometers of land. And this was only 5 percent of the land what was demanded by Chinese. Then in Sri Lanka, China did a debt to equity swap against $8 billion loan at 6 percent provided for construction of Hambantota Port against 99 years lease for managing port. Will Pakistan be treated any differently? Let time be the judge.
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