IMF's warning

The outstanding level of external debt and its servicing has become a hot topic these days. Speaking on the subject in Beijing, International Monetary Fund (IMF) chief Christine Lagarde warned China about what she said saddling other countries with a "problematic increase in debt" through its ambitious global infrastructure project. According to her, many of these colossal projects are being built by state-owned Chinese companies and financed by loans from China, leaving other states in billions of dollars in debt to Beijing. These ventures could also lead to limiting other spending in other countries as debt servicing rises creating balance of payments challenges. "In countries where public debt is already high, careful management of financing terms is critical" she has been quoted as saying. Lagarde also advocated greater transparency and cooperation to get all stakeholders on the same page to avoid such problems. "It is not a free lunch, it is something where everybody chips in, it is not just honey for the bees," she warned, saying that large-scale spending projects also came with corruption temptations for officials.
We feel that what the Managing Director of the Fund has said at the Beijing forum makes ample sense and is worth serious consideration at least for the countries which are closely involved in Chinese President Xi Jinping's signature Belt and Road initiative, a $ 1 trillion road, rail and construction project spanning dozens of countries - from Asia to Africa and Europe. It is also true that these mortar and bricks projects are being built mostly by Chinese state-owned companies and leaving the recipient countries with huge amounts of debt which would be difficult to repay. What these countries would ultimately do is difficult to say but Sri Lanka's example is quite relevant in this context. The country had already ended up deeply in debt and was left with little choice but to turn over an important asset to Beijing as a way to restructure the loans. In Sri Lanka's case, the island nation had to hand over a long-term lease in the strategically located and bustling Hambantota Port to pay down debt.
Although Christine Lagarde was talking in a broader context, yet her remarks seem to be particularly relevant in the case of Pakistan. There is hardly a day when some important functionary of the government does not talk about the benefit of the CPEC in terms of its ability to address the critical bottlenecks of energy and infrastructure in order to spur growth without saying anything about the repayment of debt. It is generally believed that these projects would jumpstart the economy and revive growth. It is also thought that Chinese have done a great favour to this country and offered a free lunch to Pakistan which is not true. The huge amount of funds provided by the Chinese has to be repaid with interest and that could only be done if we utilise this money in an optimal fashion which does not seem to be the case. Besides, Pakistan's external debt is already huge and we are repaying this debt through contracting of more loans. Since General Musharraf's exit, total external debt of the country has gone up from dollar 42 billion to dollar 85 billion and the average public debt which was reduced to 57 percent of GDP in 2007-08 has increased to over 67 percent of GDP by 2016-17. There is already a gap of nearly dollar 10 billion in our current account balance on an annual basis. In this kind of situation, Pakistan needs to be extra careful and the observations of the Managing Director of the Fund should be carefully analysed. In particular, we need to seriously think and satisfy ourselves that the gains from the CPEC will be more than the debt servicing involved in the projects. As Christine Lagarde has warned "problematic increase in debt" should be avoided at all costs.