Pakistan Reader# 689, 9 November 2023
Dhriti Mukherjee
On 8 November, in an editorial in The Friday Times titled “With Pakistan Drowning In Debt, China Pumps 'Rescue Loans' To Save CPEC,” Ahtasam Ahmad wrote that Pakistan’s economy has worsened to the extent that “Beijing has been forced to shift financing from the 'game-changing' multi-billion-dollar China-Pakistan Economic Corridor (CPEC) development scheme to emergency loan financing aimed at keeping the Pakistani economy afloat.” The shift is majorly a defensive tactic from China’s end, to prevent the negatives of Pakistan’s economy from dragging Chinese banks “into the economy abyss of default.” Pakistan is one of China’s largest borrowers, with a total of USD 68.92 billion in loans outstanding.
China-Pakistan economic dynamics: From development to rescue loans
The economic relationship between China and Pakistan has undergone a significant shift recently, to help China’s aim of avoiding a “domestic banking and financial crisis caused by high default rates.” Traditionally centred around “developmental financing,” particularly under the China-Pakistan Economic Corridor (CPEC), the focus has pivoted towards emergency rescue loans. An AidData report brings to light the magnitude of this transition, as Pakistan has received USD 28.13 billion, making it the largest global recipient of Chinese rescue funding. This is also “Pakistan’s largest debt source.”
China’s global lending strategy has witnessed strategic adjustments, moving away from long-term, dollar-denominated bilateral loans for public investments, opting instead for shorter-duration Chinese Yuan (RMB) denominated loans. This strategic shift aims to insulate Chinese creditors from the looming default risks associated with developing countries burdened by debt distress.
Navigating financial challenges: Insights from currency swap agreements
A crucial aspect detailed in the report is the mechanism of currency swap agreements and the integral role played by the People’s Bank of China (PBOC). These agreements empower nations like Pakistan to settle trade transactions using RMB, providing not only essential liquidity support but also contributing to the internationalisation of the Chinese currency. The report suggests a willingness on the part of Chinese lenders to postpone principal and interest payments, offering temporary relief to nations facing liquidity and solvency challenges.
Pakistan’s ongoing economic struggles amidst Chinese support
Pakistan requires “additional aid to stay afloat,” despite funding from the International Monetary Fund (IMF). China’s rescue lending has provided Pakistan with much-needed financial breathing room. However, it has also come at a cost. Pakistan is currently struggling with “mounting debt burdens” and heightened servicing costs. Ongoing discussions with the IMF have revealed an additional budget gap, intensifying Pakistan’s financial predicament. Although China’s future intentions with regard to Pakistan’s debt are unclear, the report highlights a potentially challenging trajectory for Pakistan, given Beijing’s withdrawal of funds from overseas escrow accounts. There is a clear indication that China is reluctant to accept financial losses, implementing stricter penalties for late repayments and demanding the replenishment of escrow accounts. In addition, China’s rescue lending has made Pakistan more reliant on China as a creditor. This has given China more power over Pakistan’s economic policy, and it has also raised concerns about Pakistan’s sovereignty.
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