Chinese ‘Belt and Road’ Loans Cause Debt Crisis in Pakistan

Pakistan labourers arrange a welcome billboard featuring the Chinese and Pakistani national flags ahead of the forthcoming visit by Chinese President Xi Jinping in Islamabad on April 18, 2015. Pakistan needs a 'huge amount of financing' for infrastructure and energy projects and China is ready to announce help when President …
FAROOQ NAEEM/AFP/Getty Images

The Wall Street Journal reported on Sunday that Pakistan is facing a debt crisis due to the enormous loans it has taken out for the Orange Line, an elevated railway in Lahore that is only the first installment in China’s $62 billion plan to bring its “Belt and Road” infrastructure initiative to Pakistan.

The Orange Line is not quite as absurd as the Belt and Road projects in Montenegro and Kenya, but it is yet another example of an incredibly expensive project that required a government to take on more Chinese debt than it can handle, much of it spent to buy Chinese goods so that Chinese engineers can build up the local infrastructure. As with other controversial Belt and Road projects, few analysts who are not working directly for either Beijing or Islamabad think the Orange Line could ever turn a profit, much less repay the gigantic loans taken out to finance it.

Financing for the Orange Line has been kept secret until now, but Pakistani opposition wants to publish the details ahead of elections this week.

Another feature of Chinese debt imperialism is on display in Pakistan, as a local government in hock to Beijing blames its own people for problems with a Belt and Road project. It is not quite as jaw-dropping as the Kenyan government insulting Kenyans as layabouts who might just deserve the abuse they have been getting from Chinese employers, but the WSJ notes that Pakistani authorities are blaming Pakistanis for causing budget shortfalls by failing to pay for Chinese electricity in a timely manner.

The Journal predicts things will come to a head in the fall when the International Monetary Fund might be asked to shore up Pakistan’s crumbling finances:

Such a bailout would likely include restrictions on borrowing and spending, the officials say, which would force the country to curtail its Belt and Road program with China, known as the China-Pakistan Economic Corridor, or CPEC.

That would be a big embarrassment for China, which has portrayed its plan as a game-changer for this chronically unstable nation of 200 million—and a chance to prove the benefits of its development model to other nations.

“You’re then effectively having the West bail out this country,” says Andrew Small, an expert on China-Pakistan relations at the German Marshall Fund, a Washington think tank. “If this is where Pakistan ends up financially, I think that’s going to be a big kind of black mark against the entire Belt and Road.”

Given that the largest donor to the IMF is the United States, one can only wonder how eager the Trump administration will be to bail out massive Chinese infrastructure projects, especially since the U.S. State Department spent the last two years warning countries about the dangers of getting on the Belt and Road gravy train and surrendering their sovereignty to Beijing. The Wall Street Journal quotes Secretary of Defense Jim Mattis accusing China of “demanding other nations become tribute states and kowtowing to Beijing” last month.

For that matter, a growing number of Chinese officials are muttering that Pakistan cannot repay its debts, which might be a way of preparing the political battlespace for a Chinese bailout or debt forgiveness plan that permanently erodes Pakistani sovereignty. U.S. and Indian analysts think China even has its eye on an Arabian Sea port called Gwadar that might be handed over to Beijing as collateral for a bailout.

Pakistani opposition leaders suspect that much of the Belt and Road money is going into political kickbacks, so the real infrastructure under construction is a framework of Chinese political influence in Pakistan. On the other hand, there is some evidence that Chinese planners are genuinely flummoxed at how much of their money has simply disappeared into Pakistani corruption and red tape.

No sooner had the Wall Street Journal published its troubling article than Pakistani media reported some $5 billion in checks written for China-Pakistan Economic Corridor (CPEC) projects bounced last week. The Pakistani government insisted work would proceed on the projects despite reports of contractors suspending their operations.

Another big problem facing CPEC is that China and Pakistan’s rival India considers the project a violation of its sovereignty because it runs through territory claimed by Pakistan in the hotly disputed Kashmir region. India also has security concerns about Belt and Road maritime trade routes that run through the Indian Ocean.

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