Pakistan Dismisses Chinese Debt-Trap Concerns

Updated on
  • Investment projects have risen to about $55 billion: minister
  • Pakistan betting GDP growth will offset repayments: BMI

Pakistan is confident of managing its rising debt obligations to China as the world’s second-largest economy boosts investment in the South Asia nation by about 20 percent.

Pakistan will be able to handle repayments of Chinese soft loans to the government and businesses, which are part of a more than $50 billion of projects under the so-called China-Pakistan Economic Corridor, or CPEC, Planning and National Reforms Minister Ahsan Iqbal said in an interview in the capital, Islamabad.

Rising debt levels in the $271 billion economy, a drop in export earnings and a widening current-account gap have raised concerns about the government’s ability to pay the obligations. Prime Minister Nawaz Sharif’s government is betting the investment on roads, ports and power plants will boost growth and generate enough revenue to repay borrowings.

“With 6 to 7 percent growth Pakistan will be in a very comfortable position,” Iqbal said. The “bulk of investment coming into CPEC is private sector investment, foreign-direct-investment, so that’s not going to disturb our debt-to-gross domestic product ratio.”

Pakistan’s government debt-to-GDP level is estimated to have risen to 66.1 percent last year from 64.2 percent in 2013, according to the International Monetary Fund.

The size of the Chinese-led investment projects has increased to about $55 billion from an initial $46 billion announced in 2015, according to Iqbal. It’s part of an initiative the Chinese government calls “One Belt, One Road” that aims to revive trade across Central Asia and into Europe via a network of railways, ports and highways.

Since coming to power China’s President Xi Jinping has sought to expand trade ties with its neighbors and position the country as an economic and military anchor in the western Pacific. U.S. President Donald Trump’s withdrawal from a long-planned Pacific trade pact has created a political and economic vacuum that China is eager to fill.

In November, Iqbal, who is heading the investment plans in Pakistan, said about $11 billion of the loans has been allocated to infrastructure projects at about 2 percent with payback in 20 years, along with a five-year grace period. The rest has been earmarked for generating electricity, with about 11,000 megawatts expected to be added by 2018 to end the nation’s chronic power outages.

However, analysts have raised doubts about Pakistan’s ability to finance repayments and repatriations if rising economic growth isn’t sustained and the government fails to reverse a drop in exports.

Despite a decline in oil imports, Pakistan has seen its six-month current account gap widen to 2.2 percent of GDP, or $3.6 billion, according to central bank data. This has been in part caused by increased imports needed for the Chinese projects, according to a BMI Research report this month.

The fall in exports has also added to doubts about Pakistan’s economic stabilization after it completed an International Monetary Fund in September. Overseas shipments fell to $21 billion is the last fiscal year, their lowest since 2010.

Economic Gamble

“Essentially, the economy is embarking on a gamble that the surge in externally-funded investment will generate sufficient growth to allow the economy to pay back its foreign loans,” said BMI. “The economy could find itself in the difficult position of having to repay large foreign loans with insufficient export revenues, similar to the situation that Sri Lanka currently finds itself in.”

Pakistan’s Prime Minister Sharif has pegged his re-election bid next year on improving infrastructure shortages in a country where industry has been hampered by widespread power cuts, which his administration has pledged to end by 2018. The government is targeting a growth rate of 5.7 percent this year.

“The point is the borrowing becomes a curse when it goes into non-productive sectors, so this investment is going directly into sectors which are going to increase our growth potential,” said Iqbal. “The CPEC financing is actually addressing the big bottlenecks of Pakistan’s economy - energy and infrastructure.”

While the public infrastructure projects will probably increase debt, if the rupee remains stable against the dollar and economic growth accelerates to 6 percent over the next couple of years, then Pakistan’s debt-to-GDP ratio should be manageable, said Bilal Khan, a senior economist at Standard Chartered Plc in Karachi.

“Repatriations related to power projects, however, could be substantial,” he said. “Although the amount will depend on how much capacity actually comes online, servicing the power plants’ loans and profit repatriation could be significant – particularly in the first few years, when firms repay the debt components of their financing.”

While Pakistan’s debt sustainability has improved since Sharif came to power, its management could be better, Finance Minister Ishaq Dar said in a statement on Saturday, without elaborating.

Iqbal also played down a spat between Pakistan’s four provinces over the levels of Chinese investment each is receiving. Punjab, the nation’s most populous province and Sharif’s heartland, has been accused of unfairly benefiting from the wave of funding.

“Differences have been resolved and all chief ministers were there in the latest Joint Cooperation Committee meeting in Beijing,” he said. “All provinces are happy and there is no dispute.”

— With assistance by Faseeh Mangi

    Before it's here, it's on the Bloomberg Terminal.