Pakistan follows Sri Lanka’s path to Chinese debt trap: report

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The Italian publication said China had been strict in recovering money from Pakistan.

Islamabad:

Pakistan’s already fragile economy suffered another setback when China recently demanded the repayment, by November 2023, of $55.6 million for the Lahore Orange Line project, Italian publication Osservatorio Globalizzazione reported. .

Meanwhile, at the end of March, foreign exchange reserves held by the State Bank of Pakistan fell by $2.915 billion, due to repayment of external debt. Thus, Pakistan faces a bleak economic future when it comes to relations with China.

The Chinese company China-Railway North Industries Corporation (CR-NORINCO) which completed the Lahore Orange Line project in 2020 demanded from the Punjab Mass Transit Authority an outstanding amount of $45.3 million by the end of March 2023 and the remaining outstanding amount of $10.5 million by the end of the year. CR-NORINCO insisted that all dues be refunded before the contract expires on November 16, 2023, Osservatorio Globalizzazione reported.

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China has struck a tough bargain with Pakistan over the repayment of its loans and other investments in Pakistan. In fiscal year 2021-22, Pakistan paid about $150 million in interest to China for using a $4.5 billion Chinese trade finance facility. In the 2019-20 financial year, Pakistan paid USD 120 million in interest on USD 3 billion in loans.

The Chinese request for the Lahore Line payment was made in the first week of April 2022 when the new political dispensation under Prime Minister Shehbaz Sharif had just taken office. Earlier, in early March 2022, China granted Pakistan’s request to roll over a huge $4.2 billion debt repayment to bring major relief to its all-time ally, Osservatorio Globalizzazione reported.

China was quite strict in recovering the money from Pakistan. Take for example the energy sector in Pakistan, where Chinese investors have repeatedly insisted on solving problems with existing project sponsors in order to attract new investment.

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Some Chinese projects in Pakistan are facing insurance issues for their loans in China due to Pakistan’s massive circular energy sector debt of around $14 billion.

Pakistan has to pay about $1.3 billion to Chinese power producers and so far only $280 million has been paid. Another example of tough Chinese negotiation over monetary relations with Pakistan is well documented in the case of the Dasu Dam project. Last year, China demanded $38 million to compensate the families of 36 engineers who died in the Dasu Dam terrorist attack.

Compensation became a precondition for the resumption of work on the project. To appease China, Pakistan later agreed to pay $11.6 million in compensation.

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While China is heavily responsible for Pakistan’s debt problem, it is the mismanagement of Pakistan’s economy by successive governments that has led to the current impasse.

Large loans from China, Saudi Arabia and Qatar, as well as 13 IMF loans over 30 years (most loan programs being canceled mid-term for non-compliance with loan conditions), are a major cause of the economic downturn.

The $6 billion IMF loan in 2019 is also on hold, and China has responded to Pakistan’s frequent requests for help.

This strategy has not borne fruit and only pushes Pakistan deeper into debt. Pakistan needs to watch developments in Sri Lanka closely as it could be the next country to face the consequences of poor economic policies and a heavy debt burden, Osservatorio Globalizzazione reported.

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