China as our lender of the last resort

05 Jun, 2023

Administrations/researchers in the West have been accusing China of being an unforgiving lender to developing countries (defined as not open to negotiations of deferral/rescheduling, a charge made more acute after the country launched its One Belt One Road initiative in 2013, a global infrastructure development strategy), non-transparent (defined as not sharing the actual amount of debt to any one country, the applicable interest rate and date of return with international donors and bilaterals) while supporting controversial projects in conjunction with the debtor government’s political leadership.

A 2023 study by AidData, the World Bank, the Harvard Kennedy School, and the Kiel Institute for the World Economy, pointed out that Beijing has considerably raised its emergency rescue lending to countries in financial distress or outright default.

However, low income countries, representing only 20 percent of all Chinese lending, are offered a debt restructuring plan that includes repayment extension but no new money while middle income countries, recipients of 80 percent of all Chinese lending, get new money through balance of payments support, with the objective of deferring default.

And this support, such is the conclusion of the researchers, is to ensure that China’s largest overseas borrowers remain liquid enough to service their outstanding OBOR projects.

“Beijing is ultimately trying to rescue its own banks. That’s why it has gotten into the risky business of international bailout lending,” so maintains Carmen Reinhart, one of the study’s authors, adding that “if you are going to bail out a borrower that is in default or teetering on the edge of default, it’s important to have a clear understanding of whether you are trying to solve a short term liquidity problem or a long term solvency problem.”

China refuted these allegations of an unforgiving lender and echoed previous statements maintaining that if it is to accede to IMF and World Bank demands to forgive a portion of its loans, so should those multilateral lenders, which it views as U.S. proxies. “We call on these institutions to actively participate in relevant actions in accordance with the principle of ‘joint action, fair burden’ and make greater contributions to help developing countries tide over the difficulties,” the Ministry statement said.

Pakistan, with very low foreign exchange reserves, 4193 million dollars on 19 May 2023 (less than two months of imports) and very weak sovereign rating (post October 2022 downgraded to almost junk status by the three major international rating agencies) has been the recipient of Chinese bail-out funds - just one out of 22 countries that have received bailout funds from China, a list which includes Turkey, Sri Lanka, Ukraine, Venezuela, Argentina, Belarus, Egypt and Ecuador.

So how much does Pakistan owe China? According to the Economic Survey 2021-22 public and publicly guaranteed debt outstanding as of 31 March 2022 from China is 14.5 billion dollars – thrice its IMF debt of 7.8 billion dollars, and exceeding the borrowings from World Bank and Asian Development Bank.

There is no further clarity as to the total amount owed to China by Pakistan in data uploaded on Pakistan government websites but a report uploaded on the website of the International Monetary Fund (September 2022) maintains that China and Chinese commercial banks hold about 30 percent of Pakistan’s total external debt of about 126 billion dollars with the bulk of this debt accruing under China Pakistan Economic Corridor (CPEC) projects.

Bloomberg contends that at the end of last fiscal year Pakistan’s outstanding bilateral debt to the Paris Club countries was about 10 billion dollars while it owed 23 billion dollars to China out of which around 10 billion dollars was owed to “commercial banks” (defined as state-owned Chinese lenders operating as official financing arms for China’s Belt and Road Initiative).

Between July 2021 and March 2022, over 80 percent of Pakistan’s bilateral debt service went to Beijing. The news agency adds that: (i) as per Economic Survey China’s SAFE (State Administration of Foreign Exchange) lent 7 billion dollars to Pakistan which is not clarified in the budget; and (ii) 8.77 billion dollars is owed to three Chinese state- owned lenders notably Bank of China, ICBC and China Development Bank who between 2016-17 and 2020-21 extended short-term loans of 11.48 billion dollars though how much is still outstanding is unclear.

There is empirical evidence that Chinese investment under CPEC umbrella did fuel growth during the PML-N tenure (2013-18) culminating in 5.8 percent in 2018; however, it exacerbated imbalance in the economy by a rise in imports (machinery and material for the IPPs) while exports lagged resulting in a balance of payments crisis that led to the 2019 IMF programme loan.

Recent reports indicate that the Chinese Charge d’Affaires met with Tariq Fatemi, Special Assistant to the Prime Minister on Coordination, and conveyed concerns that overdue receivables to Chinese power companies (established under CPEC, an arm of OBOR) have reached 1.5 billion dollars and the amount is accumulating with time with the Power Division seeking 700 billion rupees (2.45 billion dollars at the interbank rate of 285.45 as on Thursday this week past) in next year’s budget to clear overdue payments under CPEC projects.

The Pakistani government has suggested that the dues maybe offset by China purchasing surplus power for Afghanistan though the extent of Chinese engagement with the Afghan Taliban has waned considerably in recent months. The 2023 study also notes that China increasingly requires cash be put into “a hidden escrow account” that would lead to China being at the top of the queue of creditors to be paid.

Chinese IPPs in Pakistan have reportedly refused to renegotiate the contracts signed during the previous PML-N tenure - a process that began during the Khan administration with assistance from the premier spy agency but while non-CPEC IPPs agreed to the new terms that favoured the country and our consumers the CPEC IPPS refused to re-negotiate - by arguing that this may lead other countries to seek similar concessions. The CPEC IPPs further insisted that the sanctity of the contracts signed must be upheld.

In this context it is relevant to note two disturbing ground realities: (i) Sinosure (the Chinese insurance company without whose approval no Chinese company can invest) is no longer approving any new projects in Pakistan due to failure to meet contractual obligations; and (ii) Pakistan set up a 50 billion-rupee escrow account in November 2022 for automatic partial payments to Chinese IPPs no doubt to pacify Sinosure.

Be that as it may, given the severe and an almost daily worsening macroeconomic impasse in the country today, with limited fiscal space and rising demands from the recipients of current expenditure one would assume that the current economic team leaders’ only pro-growth strategy for budget 2023-24 is likely to be through an expansion of CPEC projects.

So where does Pakistan stand today? Foreign exchange reserves are disturbingly low that account for the government continuing severe administrative measures to curtail private sector imports and limiting critical imports by state entities (fuel and essential food items) thereby creating hardship for the general public as well as compromising the capacity of Independent Power Producers (IPPs) including those operating under the umbrella of CPEC to import fuel or repatriate profits.

Failure to reach a staff level agreement with the Fund on the ninth review has created a rather difficult situation for Pakistan and China, our long term strategic partner: heavier than ever reliance on China for bailout (roll overs and new loans), reliance on expanding the scope of CPEC to fuel domestic growth as foreign direct and domestic investment continue to shrivel while China is insisting that Pakistan follows the Fund prescriptions as a way to resolve its problems due to flawed policy decisions which sadly continue and include passing on the onus of poor performing sectors onto the hapless consumers through ever rising utility rates, taxing the already taxed while resisting attempts to widen the tax net for political reasons and raising current expenditure, a highly inflationary policy, to sustain the elite capture of government expenditure.

Copyright Business Recorder, 2023

Read Comments