By Asanga Abeyagoonasekera and Qamar Cheema 15 March 2023
Nearly two hundred and twenty million in Pakistan are going through power blackouts due to the aggravated economic crisis the country is facing. Under China’s China-Pakistan Economic Corridor (CPEC), multiple power plants were built, and now the Chinese have left due to no payments. Pakistani government failed to pay 300 billion rupees ($1.5 billion) to the Chinese, and there is a power shortage in the country. Pakistan’s lack of foreign reserves was the main reason for non-payment.
Sri Lanka’s debt to GDP ratio is 119%, and Pakistan’s is at 70%, another clear sign of the unsustainable debt which has triggered the present economic crisis in both nations.
Just like Sri Lanka, which faced an energy crisis due to a lack of foreign reserves that depleted to near zero, Pakistan’s foreign reserves are around USD 4.3 Billion, enough for the next two months to survive. The energy crisis, followed by the food crisis, began the Sri Lankan case of the public uprising against the regime. Pakistan is in the same direction. The agricultural produce had a direct impact when President Gotabaya introduced an overnight switch from chemical to organic fertiliser. In Pakistan, the recent floods destroyed 8 million acres of crops making the country more vulnerable to a food insecurity crisis. Pakistan reports 40% of food insecurity, and Sri Lanka around 30%.
Months ago, Sri Lanka reached out to IMF for a USD2.9 billion to stabilise its economy, and Pakistan also has sought IMF assistance of USD7 billion. Both countries have reached out to IMF multiple times, but this time is different; Sri Lanka reaches out for the 17th time as a bankrupt nation and Pakistan for the 23rd time, with barely any credibility to sustain its debts. China-backed off from both countries on restructuring, only limiting to a moratorium of two years for Sri Lanka. Pakistan could not get a moratorium but had the facility to borrow back $ 2 billion.
Chinese President Xi started making points of shared growth and common prosperity which meant only business, trade, and economic development, and ignored global values of democracy, freedom of speech, and human rights. China Pakistan economic corridor (CPEC) under the belt and road initiative (BRI) was taken by the political class and military as a trust in leadership and normalcy in the country after years of military operations against terrorists in Pakistan. Politicians remained under pressure from the military for bad governance, so these loans were received without realising that jobs would be created once. Still, these projects are non-self-sustained, and subsidies are given from the public exchequer in Pakistan.
In Sri Lanka, BRI was endorsed and taken forward by President Mahinda Rajapaksa and continued by the subsequent governments in power, promising thousands of jobs and financial returns. None has materialised, projects such as Hambanthota port, Mattala airport, a port city in Colombo and the tallest tower in South Asia, the “Lotus tower” with a revolving restaurant, have barely generated any revenue. Some infrastructure remains as ghost airports without any flights and scarcely any investment in port city land in Colombo.
Former Prime Minister Nawaz Sharif participated in the One Belt One Road summit in 2016 to approve a long-term plan for China Pakistan Economic Corridor, a total of USD60 billion project. In the CEPC project, thousands of acres of agricultural land were to be given to Chinese enterprises for demonstrating projects from seed varieties to irrigation technology to start farming at an industrial scale. Extensive cities and main highways from Peshawar to Karachi, visa-free entries for Chinese nationals, investments in fiber optics, Chinese enterprises like China Mobile and Huawei Telecommunication, and China Metallurgical group corporation in mining and minerals were part of the Chinese BRI portfolio in Pakistan. From constructing roads, building Gwadar Port, making wineries, and establishing the ‘Coastal Enjoyment Industry.’ was part of CPEC.
The military was the primary stakeholder in CPEC because of its influence in the political and institutional arena. Politicians created a consensus that CPEC projects and Chinese investment is of national interest, so questions must not be raised. Pakistanis facing energy shortage and needed infrastructure transformation remained silent on the terms and conditions on which this foreign direct investment was coming into Pakistan. Army raised two security divisions to protect Chinese businessmen and projects from terrorist organisations. The government deployed more than 15000 military personnel in the Special Security Division (SSD). SSD provided security to 34 projects, whereas Maritime Security Force (MSF)provided security to coastal area projects. There is no information on how much money goes into the security of Chinese projects. Army and Navy have been getting funds from these projects to provide protection, but Chinese workers have been killed and targeted by Baloch separatists and Tehreek e Taliban Pakistan (TTP). Chinese offered to bring its private security for CPEC Projects, but Pakistan disagreed as it embarrassed the state.
In Sri Lanka, unlike Pakistan, it was not military at the forefront but the political elites who prioritised the BRI projects. There was no transparency in the BRI projects manoeuvred by the political elites; the public has yet to see the Hambanthota lease agreement nor the port city agreement, which was never discussed in parliament nor taken comments from the public. There was no stakeholder engagement and proper due diligence, and the feasibility of the projects was never assessed due to political influence to push the projects forward. Above all, corruption is the single most significant concern in many of these projects that could never be investigated due to Chinese influence in Sri Lanka.
In Pakistan, loans to Pakistan from the Chinese government and Chinese banks were of 3.76% interest, whereas Western financial institutions gave around 1 %. Similarly, some loans were taken at 6.5% in Sri Lanka for Hambanthota port. The maturity period of the Pakistan loans is 13.2 years, and the grace period is 4.3 years, whereas the same loans to France and Japan are at 1.1 % with a repayment of 28 years. The real challenge for parliament, media, civil society, the political class, and bureaucracy has been the lack of a clear understanding of the terms and conditions in Pakistan and Sri Lanka. Federal ministers or concerned ministers who dealt with loans and projects have yet to utter a single word in the presence of the media about the terms and conditions of Chinese loans. A typical statement is that national interest will be compromised, and the Chinese do not like contracts to be made public. Pakistan’s incumbent foreign minister said, “loans from China are the price of development”. According to the ministry of finance, Chinese debt to Pakistan is more than $ 14,000 Million, the highest debt Pakistan has to pay to any country. Independent sources say Chinese debt is around $ 30 billion as Chinese and Pakistani officials have not made it public debts from China.
Comparatively, Sri Lankan debt to China is less than Pakistan, at close to USD10b, a considerable amount, and some economists estimate it’s around USD20b. Taking the lower debt percentage of China, around 10% compared to private bonds, the Chinese debt trap was debunked by several western think tanks after the pandemic, where China played a massive damage control role, funding many think tanks to create a positive image. Unfortunately, the debt trap debunking theories has yet to see the more comprehensive strategic trap China has managed to install in countries like Sri Lanka and Pakistan. The ‘strategic trap’ is orchestrated in three principal areas political funding by CCP, human rights support to repressive regimes and military assistance.
CPEC was considered hope as the Chinese heavily invested in infrastructure and the energy sector, but Pakistan failed to establish economic zones for manufacturing and export. Gwadar port is still dysfunctional as electricity is coming from Iran for this project. Locals have migrated from the project site because of securitisation and Chinese dominance in projects which marginalise the local Baloch population from local resources. Chinese presence has given rise to the right-wing Islamist party Jamat I Islami in Gwadar. People have demonstrated under the leadership of right-wing Islamic cleric Hidyat Ur Rehman who questioned the federal government and security institutions for unnecessary security check posts and for depriving small fishermen of fishing. Chinese investors had to shut down a wine factory because of Islamist pressure and protests. The rise of Islamist influences in Baluchistan, stagflation, corruption in Chinese projects, absence of transparency, marginalising of locals, the resurgence of terrorist activities and merger of Islamist and Baloch militants, and failure to revive the economy are some of the troubling realities of CPEC.
The BRI projects in Sri Lanka and Pakistan have similar patterns raising questions on transparency, lack of due diligence, opaqueness, corruption, and heavy political-military influence. While China is not the only concern for the crisis, China could be identified as a considerable concern in Sri Lanka and Pakistan. Both cases are good examples of other BRI nations that have borrowed considerably.
Dr Qamar Cheema is currently based in Washington, DC. He is an academic, strategic and political analyst. Asanga Abeyagoonasekera is a Senior Fellow and the Executive Director of the South Asia Foresight Network (SAFN)at the Millennium Project in Washington, DC.