Pakistan’s latest economic survey indicates the extent of Pakistan’s debt to China. Higher Chinese lending rates, reckless borrowing and a fat defense budget are negatively affecting Pakistan’s already deteriorating financial health. Ironically, solutions to these problems cannot be found without involving China, which could lead to even more debt traps. Pakistan has been deeply dependent on foreign aid from international monetary agencies since its independence in 1947. This is a cause for concern, and debts could collapse Pakistan’s financial system, reducing it to a “vassal state” of the China.

The Economic Survey of Pakistan (2021-22) shows the country’s deep economic ties with China. Instead of indicating that China’s growing debt is rising sharply, and it stands at $87.7 billion in circulation. A devalued currency, rising inflation and the worst balance of payments, all of which sparked a political crisis, could be attributed to its policy of irresponsible borrowing, especially from China, at higher interest rates. At the same time, as Pakistan faces an acute financial crisis, the defense budget has increased enormously. Budget support for defense has increased by 11%, unlike the budget for education, housing and health which has been considerably reduced. This indicates the deviation from welfare oriented programs for the people of Pakistan. The spending in the development sector was reduced by 11%, health (31%), education (1.5%) and housing (77%).

The increased volatility of the country’s trade deficit and its consequent impact on the current account deficit has already done enough damage. Given that Pakistan will have to import substantial quantities of expensive wheat this year due to low domestic production, the risk of exposure to world markets would remain higher. Inflation caused by rising electricity and gas prices and global supply-side shocks to fuel and commodity prices will continue to plague the economy for many months to come. The growth rate recorded at 5.97% is unsustainable due to market volatility and colossal borrowing. Pakistan blindly follows the path of Sri Lanka, which will lead the country to fall into the trap of Chinese debt.

China’s outstanding loan to Pakistan is $14.5 billion, while the Asian Development Bank (ADB) ($14 billion) and the World Bank ($18.1 billion) have amounts comparable. However, other types of loans are not reflected in the budget document, such as China’s State Administration of Foreign Exchange (SAFE) which lent Pakistan about $7 billion in loans. Pakistan also owes $8.77 billion to “commercial banks”, including West Asian banks and three Chinese lenders – Bank of China, ICBC and China Development Bank, all state-owned banks. Between 2016-17 and 2020-21, the three Chinese lenders provided short-term loans worth $11.48 billion to Pakistan.

China’s loans to Pakistan are short term and the interest rates are very high ranging from 4.5% to 6% which is higher than other lending agencies such as ADB, World Bank, IMF, etc., which is generally less than 3%. %. Even the bilateral interest rate is 3% to 3.5% compared to other countries, which is 1%.

American statesman John Adams, who served as president from 1797 to 1801, once said, “There are two ways to conquer and subjugate a country: one is by the sword; the other is in debt. Ironically, China is one of the biggest creditor countries in the world. According to the 2020 report, its lending to low- and middle-income countries has tripled over the past decade, reaching $170bn (£125bn). AidData, a global development agency at William & Mary University in the United States, says half of China’s loans to developing countries are missing from official debt data. It is usually kept off public balance sheets, directed to state-owned companies and banks, joint ventures, or private institutions, rather than directly from government to government. There are more than 40 countries, according to AidData, that owe Chinese lenders more than 10% of their annual (GDP). It happened because of this concept of hidden debt.

Countries like Djibouti, Laos, Zambia and Kyrgyzstan have debts to China equal to around 20% of their GDP. And a significant portion of the debt is payable to China under the major infrastructure projects like roads, railways, ports, mines, power, etc. under the Belt Road Initiative (BIS).

China is responsible for Pakistan’s debt crisis. If Pakistan goes bankrupt tomorrow, China may seek alternative routes to ports in the Indian Ocean Region (IOR). This will give a turning point to South Asian geopolitics. Moreover, if the Russian-Ukrainian crisis persists, which is very likely, many other economies in the South Asian region would collapse. But India has a window of opportunity to change South Asian geopolitics, keeping national interests in mind.

Pakistan needs billions of dollars immediately to keep its foreign exchange reserve at an acceptable level, not to default on loan payments. Moreover, the continuous flow of oil and energy on credit is inevitable to avoid protests from the population. Corruption, economic disorder, slowdown and excessive defense spending are mainly used to finance terrorism against India and many other countries. These are the main causes of Pakistan’s economic deterioration.

Pakistan’s relationship with Iran is dictated by the United States and China, which other Gulf countries do not like. To obtain financial assistance from the Gulf countries, Pakistan must change its Iranian policy, which will go against the interests of the United States and China; thus, Pakistan is caught in a dilemma.

The permanent solution to the problems faced by countries lies in co-opting China into a problem-solving mechanism. We must ask China to lower interest rates, extend repayment periods and cancel certain debts. This will help countries like Pakistan, Sri Lanka, Maldives, Myanmar, etc. get out of the debt trap.

The International Monetary Fund (IMF), China and other stakeholders should cooperate to help countries facing financial imbalances and high debt along the Belt and Road Initiative (BRI). However, it will not be easy. Before providing aid, the IMF will demand transparency on BIS loan terms, which are opaque and can weigh heavily on highly indebted countries. So far, China has not allowed the involvement of international agencies in the BRI. But the basis for cooperation already exists.

Pakistan has requested a $6 billion bailout for 39 months from the IMF. Progress in IMF-Pakistan loan negotiations was made after Pakistan agreed to carry out reforms in the financial sector and said policies to enhance macroeconomic stability would be undertaken.

How true this is, I can’t say, but rumors are circulating that Pakistan may lease Gilgit Baltistan to China to pay off the debt. Gilgit Baltistan is part of the former state of Jammu and Kashmir and is not under the jurisdiction of Pakistan. Therefore, massive investment in this region by a third party (China) can be considered unconstitutional and contrary to international law. If that happens then, it is certainly cause for concern for India.

From the Indian perspective, it can be concluded that the Chinese debt trap could limit Pakistan’s economic growth, thereby reducing its ability to create problems for India.

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