Two decades of Chinese lending to Pakistan totaled about $21 billion more than previously thought, a study revealed this week, while also showing that the cash-strapped South Asian country has the biggest China-funded energy portfolio in the world.
AidData, a research institute at William and Mary University in the U.S., calculated Pakistan’s cumulative public debt exposure to China at $67.2 billion for the period from 2000 to 2021. That surpasses the $46 billion recorded for the same period in the World Bank’s International Debt Statistics, based on voluntary disclosures from Pakistan.
The Global Chinese Development Finance report released on Tuesday comes amid growing scrutiny of Beijing’s lending, particularly for Belt and Road Initiative (BRI) infrastructure projects in the fragile economies of the so-called Global South. The researchers found that “Beijing is navigating an unfamiliar and uncomfortable role as the world’s largest official debt collector,” with 80% of its lending involving countries in financial distress.
Pakistan, home to the $50 billion China-Pakistan Economic Corridor (CPEC), a flagship BRI project, is a prime example. It is the third-largest recipient of Chinese loans, after Russia and Venezuela, the data shows. But Islamabad, which has been rocked by a political crisis and heavy inflationary pressure, was forced to obtain a $3 billion standby arrangement from the International Monetary Fund this year to avoid a debt default.
With the country heading into a turbulent election season, the Chinese debt load could be a focus of debate, particularly as the party that initiated CPEC appears to have the pole position.
The methodology for measuring such debt is a matter of some debate. The AidData report calculates public and publicly guaranteed debt (PPG), including loans for which the central government or its agencies are liable for repayment. The research lab used what it calls Tracking Underreported Financial Flows (TUFF) methodology, drawing on 147,703 sources in more than a dozen languages.
Bradley Parks, the executive director of AidData and an author of the report, told Nikkei Asia that the institute uses the Organisation for Economic Cooperation and Development’s definition of an “official sector” creditor, which encompasses any lender that is majority-owned by the government of the creditor country.
But Stella Hong Zhang, a China public policy postdoctoral fellow at the Harvard Kennedy School’s Ash Center, argued that AidData uses a broader-than-usual definition of PPG debt, resulting in larger figures for some countries.
“This decision to include short-term debts may be controversial and should be subject to further scholarly debate,” she said.
Defending AidData’s method, Parks explained that China’s loans to Pakistan often enter the front door as short-term debts with maturities of 12 months or less, but exit the back door as long-term debts.
“Rolling over debts with [maturities] of 12 months or less, year after year, is effectively a loophole in international reporting rules that allows governments to underreport their true levels of public debt exposure to China,” he said.
The Chinese Embassy in Pakistan did not respond to a request for comment.
A significant portion — $28.4 billion — of Pakistan’s loans from China were in the energy sector, AidData found. Experts believe Islamabad actively sought Beijing’s support in the field, accumulating the largest amount of Chinese energy financing of any country.
Ammar A. Malik, a senior research scientist at AidData and co-author of the report, told Nikkei that Chinese funding in the energy sector was a direct response to the former Pakistan Muslim League-Nawaz (PML-N) government’s singular focus on solving the country’s crippling power shortages.
Zhang said that “China’s priority was in the connectivity projects” but that Pakistan’s government wanted much of the initial CPEC financing to go toward energy. In recent years, however, Pakistan has struggled to pay its power bills to China.
The numbers in the AidData report have direct relevance to Pakistan’s election, scheduled for Feb. 8.
Of the $67.2 billion in total financing, $36 billion accumulated under the PML-N government of Nawaz Sharif, who was in power from 2013 to 2017. Sharif recently returned from years of self-imposed exile in London to help the party campaign, apparently with the tacit support of Pakistan’s powerful military. Most analysts believe the PML-N has the military establishment’s backing to win next year’s polls, amid an ongoing clampdown against what is thought to be the country’s most popular party, the Pakistan Tehreek-e-Insaf (PTI) of jailed former Prime Minister Imran Khan.
Pakistan’s former Prime Minister Nawaz Sharif walks with party workers and police officers as he leaves a court appearance in Islamabad on Oct. 24. © Reuters
Malik, who leads the Chinese Development Finance Program at AidData, said that in Pakistan’s political landscape, the PML-N has always been the most forceful in claiming credit for bringing Chinese money into the country.
In contrast, Imran Khan, who led a PTI government from 2018 until his ouster in April 2022, developed a reputation for causing friction with China, although Zhang questioned that narrative.
“The reason why financial flows from China slowed down after 2018 was also because of the consequences of the investments made in the 2013 to 2018 period,” she said.
Either way, while Beijing has poured billions into Pakistan in the last two decades, analysts expect more of a trickle in the years ahead, regardless of who runs Islamabad.
“We see a pattern of Pakistan asking for certain sums and then China supplying smaller amounts. I would guess this pattern will continue,” said Jeremy Garlick, an associate professor of international relations at Prague University of Economics and Business.
Garlick predicted that China will provide just enough money to help Pakistan stave off insolvency, and no more.
AidData’s Malik and the Kennedy school’s Zhang agreed.
“No matter which party comes into power after 2024,” Zhang said, “there will not be a significant pickup of Chinese financing unless the underlying issues regarding Pakistan’s macroeconomic and fiscal situation are improved, especially the circular debt problems in the power sector.”
Source: Nikkei Asia