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3 November 2018

Under the guise of friendship, China is looting Pakistan

By ALI SALMAN ANDANI 
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Pakistan and China define their friendship as “higher than the heights of the Himalayas and deeper than the depths of the Arabian Sea.” To make it even stronger, President Xi Jinping of China visited Pakistan in April 2015, with a multibillion-dollar investment plan – the China-Pakistan Economic Corridor (CPEC), the main plank of Xi’s Belt and Road Initiative (BRI).

China has always defined the BRI as a win-win situation, implying that both China and host countries would enjoy the resultant economic prosperity. The truth, however, is completely different.

Basically, “win-win” probably meant that China would “win twice.” Unfortunately, the CPEC has burdened Pakistan’s economy with a lot of debt and trade deficits, and pushed the country on to the brink of bankruptcy. As well, China did not provide Pakistan with industrial technology to help it boost exports, nor did it create many jobs in the country – because the project has mostly hired Chinese laborers.

Basically, ‘win-win’ probably meant that China would ‘win twice’


It was the burden of Chinese debt that forced Sri Lanka to hand over its Hambantota Port to China and a massive piece of land in Colombo to Chinese multinational corporations, in return for debt relief. The fear of a debt trap pushed Malaysian Prime Minister Mahathir Mohamad (pictured below) to halt the contract for China Communications Construction Company to build the East Coast Rail Link, thought to have cost the government around US$20 billion, along with a $2.5 billion agreement for an arm of a Chinese energy giant to construct gas pipelines. He had earlier suspended the projects, leading some analysts to believe that he wanted to renegotiate the terms during his China trip.

Story of a so-called friend

Honestly, you can’t call a country your friend when it forces you to buy its equipment and material to be used in its projects – a port, coal-fired power plants, roads and railways (the CPEC). And when this exercise severely shreds your dollar reserves and piles up government expenses, this so-called friend offers a helping hand in the form of billion-dollar debts – so that you can keep importing from it.

Ultimately, you find yourself in the middle of nowhere. Your people suffer; you arrange a funeral ceremony of your economy with just enough foreign reserves that you can barely afford imports of two months. Then the so-called friend offers you some more debt, so that you can buy necessary goods (or otherwise, your citizens will starve).

You say thanks to your so-called friend and move on in your life. Suddenly, you see your economy standing on the brink of an ultimate collapse. You knock your so-called friend’s door for help, but this time, you face a blatant “no.” Why? Because your so-called friend wants to improve its image in the eyes of the world powers – as they think that your so-called friend is using you like a tissue paper.

Hopelessly, you approach an international lender (the International Monetary Fund), which offers you some help on condition that you will have to make the economic deals with your so-called friend public. When that so-called friend becomes aware of the bank’s (IMF) conditions, it warns you, saying that the loan from the bank (IMF) should not affect our “so-called friendship.”
The curse of Xi Jinping’s ‘debt-trap diplomacy’

China has been accused by the West of leveraging huge loans it holds over less developed economies across the world in order to snatch their key assets and increase its military intervention.

From Pakistan to Montenegro, from Laos to Kyrgyzstan, many nations owe huge debts to China. Let us take the example of Sri Lanka. It owed more than $1 billion to China and unfortunately wasn’t able to service the debt; China reportedly forced it to hand over Hambantota Port on lease for 99 years.

In April this year, China approached Vanuatu to set up a military base, which owed Beijing about $250 million. Tonga also carries some big debts and is facing difficulties in servicing them. The prime minister of Tonga, Akilisi Pohiva, in August showed his concerns over China’s debt-trap diplomacy, saying Beijing was preparing to seize assets from his country.


China forces Pakistan to buy Chinese equipment for use in Chinese projects, shredding its reserves; then it extends Pakistan loans to cover the purchases, which increases the burden of debt on Pakistan’s economy

For Pakistan, the situation seems alarming. China forces it to buy Chinese equipment for use in Chinese projects, shredding its reserves; then it extends Pakistan loans to cover the purchases, which increases the burden of debt on Pakistan’s economy. Machinery imports alone from China in the first two years of the CPEC raised Pakistan’s current-account deficit by 50%.

Now Pakistan is facing a severe foreign-currency shortfall, especially the US dollar holdings of its central bank, which have dropped to $8.4 billion, barely enough to pay for two months of imports. The trade deficit is skyrocketing; in the fiscal year ending last June, exports were $23.22 billion while imports exceeded $60 billion. Indeed, its public-sector debt stands at $75.3 billion — 27% of Pakistan’s gross domestic product.

Islamabad needed an urgent cash injection for its suffering economy, for imports and clearing debts. It is not that Pakistan didn’t ask China or Saudi Arabia to bail it out. Even Saudi Arabia agreed to invest in the CPEC in the form of an oil refinery in Gwadar, but China had concerns, as Saudi Arabia is a major non-NATO ally of the United States and any involvement of the Saudis in CPEC would indirectly mean allowing US intervention. Economic deals between Beijing and Islamabad related to the multibillion-dollar “debt trap” that is CPEC have been kept behind an opaque sheet of “we trust each other” from Day 1.

The United States, on every occasion, has accused China of predatory lending practices and ruining small economies. In my opinion, China had to portray itself as “sincere and unselfish” and therefore, it was a blatant “no” from Xi for another bailout for Pakistan. Or, it may also be that Pakistani Prime Minister Imran Khan’s government is aware of the dark realities of China’s Belt and Road Initiative.
Coming out of a fool’s paradise

As The News reported on October 1, Pakistani Railway Minister Sheikh Rashid Ahmad (pictured above) said the estimated cost of expansion and reconstruction of ML-1 (Main Line-1 that runs from Peshawar to Karachi) under the CPEC had been brought down to $6.2 billion from $8.2 billion. “Pakistan is a poor country that cannot afford [the] huge burden of the loans,” Rashid told a news conference in Lahore. “Therefore, we have reduced the loan from China under CPEC for rail projects from $8.2 billion to $6.2 billion.”

Remember that Financial Times report?

“The previous government did a bad job negotiating with China on CPEC – they didn’t do their homework correctly and didn’t negotiate correctly, so they gave away a lot,” Abdul Razak Dawood, the Pakistani cabinet member responsible for commerce, textiles, industry and investment, told the FT.

“I think we should put everything on hold for a year so we can get our act together,” he added. “Chinese companies received tax breaks, many breaks, and have an undue advantage in Pakistan; this is one of the things we’re looking at because it’s not fair that Pakistani companies should be disadvantaged.”

What Dawood said clearly shows that Imran Khan’s government is skeptical about China’s intentions behind pouring billions of dollars into Pakistan.
Between China’s warning and IMF’s conditions

Imran Khan is known for the slogans he raised during his election campaign, that if Pakistanis would give him a chance to form the government, he would break the country’s addiction to begging the West for dollars whenever it finds itself in a financial crisis. On October 8, Khan forgot his lofty claims and allowed Finance Minister Asad Umar to announce that Pakistan would seek a hefty loan from the IMF. It will be the country’s 13th bailout from the IMF since the 1980s.

Khan forgot his lofty claims and allowed Finance Minister Asad Umar to announce that Pakistan would seek a hefty loan from the IMF. It will be the country’s 13th bailout from the IMF since the 1980s

And for sure, it will face strict conditions imposed by the Fund. It may force the Khan-led government to privatize steel mills and Pakistan International Airlines. And this would result in tens of thousands of jobs being lost, which will come with countrywide protests against Khan’s party, Pakistan Tehreek-e-Insaf. Before the announcement, the dollar in Pakistan was trading at 125 rupees to $1 — after that, the rupee has been devalued to 135 per US dollar.

The rupee’s depreciation has increased Pakistan’s debt by $6.75 billion, thus contributing to some more economic woes for the nation. Just after Asad Umar announced the government’s decision to seek a bailout package from the IMF on the night of October 8 came a substantial single-day stock-market loss by more than 1,300 points – losing almost 270 billion rupees ($2 billion) of its capitalization.

The government has failed to restore investor confidence, and thus the selling spree has continued.

As a result, the index dropped below 37,000 points. The IMF’s projection that the inflation rate might hit 14% by June 2019 further intensified the situation.

And there is yet another huge burden on the shoulders of Imran Khan and his cabinet – to disclose the nature, size and terms of the debt that Pakistan is bearing. Christine Lagarde, managing director of the IMF (pictured below), clearly said the Fund would expect “absolute transparency about the nature, size, and terms of the debt that is bearing on a particular country,” and although she did not explicitly mention China in her remarks, they were given directly in response to a question about Pakistan’s stockpile of Chinese debt.

The transparency must extend to “the extent and composition of that debt,” she added, regarding whether it was government-owned or by state-owned enterprises “or the like of it,” which presumably means it also includes private-sector debt.

If Pakistan gives access to all the hidden information related to CPEC deals to the IMF, it will end up hurting its fair-weather friend China. The State Bank of Pakistan is not aware of the details of the CPEC deals and therefore, it compiles its own debt-sustainability forecasts on the basis of the incomplete information available.

If Pakistan gives access to all the hidden information related to CPEC deals to the IMF, it will end up hurting its fair-weather friend China

No one knows what China and Pakistan have possibly agreed on.

What Chinese Foreign Ministry spokesman Lu Kang said at his press briefing in Beijing was shocking. On one hand, he endorsed Pakistan’s request to the IMF for financial assistance, but cautioned that the facility should not affect economic cooperation between Islamabad and Beijing, as Dawn reported.

Like a good friend of Pakistan, Lu could have endorsed the help that the IMF is offering to Pakistan – but the so-called “friend” cautioned Islamabad that the facility should not affect economic cooperation between the two countries. Already Pakistan’s stock exchange is suffering, and this statement will contribute to investor confidence being lost, as it would make investors more skeptical about the possible consequences of Pakistan disclosing the hidden deals of CPEC.

Friends don’t threaten each other, and China needs to understand that.

China should at least offer a helping hand to Pakistan in its truest sense. Rather than enmeshing it in a debt trap, it should invest in Pakistan’s magnificent renewable-energy potential, such as financing solar-power plants in Balochistan and Sindh provinces, so that the country can cut down expensive crude-oil import for electricity generation. And it should help the country boost its exports by providing it with advanced industrial machinery and technology, so that the country can obtain comparative advantage in the production of some high-valued items.

There is nothing wrong in taking help from a “friendly” nation for the sake of energy and transport sector development, but as the world works on the theory of realism and capitalism, there is nothing like a free lunch.

China is securing its interests in the multibillion-dollar CPEC – and currently even enjoying Pakistan’s piece of the cake.

Only after Pakistan begins to export more will it be able to acquire sufficient dollar reserves to fulfill its demands of energy and infrastructure on its own. Substantial macroeconomic changes have to be made so that it can produce, consume, save, expand and export efficiently.

Investment on research and development is needed. Barriers to enter and exit markets must be reduced. It will have to ask other countries (and not just friends) to make investments in its market. If the country properly explores its renewable-energy potential, it won’t need coal, gas or petroleum to fuel its power plants.

This article first appeared at DailyO (India Today).

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