Sharif's Beijing visit reveals limits of China's assistance

Pakistan's financial situation is progressively worsening with mounting public debt over 60 per cent of the tax revenues in debt servicing

Pakistan PM Shehbaz Sharif paid a two-day official visit to China from November 1-2 to greet Chinese President Xi Jinping for his third term as General Secretary of the Chinese Communist Party. Sharif was buoyed with hopes that Pakistan's "all-weather friend" Xi, savouring his new five-year term, would assist Pakistan with fresh investments and loans to rehabilitate its flood-ravaged economy. While Xi promised to do his best "to support Pakistan in stabilising its financial situation", he stopped short on making any specific commitments, which Sharif had expected.

Sharif had gone with a long wish list seeking new investments for the decrepit Karachi-Peshawar rail line (1872 km) severely damaged in the recent floods, the new Karachi Circular Railway, 10,000 MW solar, wind and other renewable energy projects, desalination water plant for Karachi, two hydropower projects, rescheduling of repayments on Chinese loans and a new loan of $ 3 billion for the balance of payments support.

China, which is going through a severe economic downturn due to the recurrence of the Covid outbreaks and high inflation due to the Ukraine war, is scaling back its investments in the Belt and Road Initiative (BRI) projects. China's investments in Pakistan have slowed down in recent years due to differences in the cost and financing of these projects, timely payments for power consumed to the Chinese Independent Power Producers (IPPs) and pressure from the IMF to review these agreements, which are weighted heavily in favour of the Chinese IPPs (for instance, they are guaranteed minimum 20 per cent profit in dollar terms by the Pakistan government).

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Similarly, the Karachi-Peshawar rail project has been the subject of arduous negotiations on its size and mode of financing. Imran Khan's government wanted this project to be signed for $ 6.1 billion, while China asked for $8.2 billion (2018). Now Pakistan is willing to pay $9.85 billion but wants this amount to be invested by the Chinese companies on a build-operate-transfer (BOT) basis. The Chinese companies are unwilling to take risks and want the Pakistan government to provide sovereign guarantees. During Sharif's visit, the two sides agreed to work together "to create the conditions" for the early implementation of this and the Karachi Circular Railway Projects.

Another controversy which has hit the Chinese projects in Pakistan pertains to the Gwadar port. The Chinese are keen on developing the Gwadar port as it provides them direct access to the Arabian Sea coast and improves transport and communication links with the Middle East countries from where they import much of their crude oil and gas. The port has yet to generate much maritime traffic or industrial activity in its hinterland. Gwadar receives little rainfall, and there are no adequate arrangements for power and water supply in the area.

During Sharif's visit, Xi asked him to accelerate the construction of auxiliary infrastructure for Gwadar port to realise its potential in driving regional development. The Pakistan government is against setting up a 300 MW power plant based on imported coal like other such projects in Pakistan. It has asked China to establish it on LNG or local Thar coal or renewable energy; an agreement has yet to be reached on these issues.

The safety of the Chinese personnel working in Pakistan is another sticky issue on which Xi expressed "great concern" and asked Sharif to provide a "reliable and safe environment" given continuing attacks by the Tehreek-e-Taliban Pakistan and Baluch Liberation Front elements. China wants Pakistan to allow its own security companies to protect the Chinese personnel on Pakistani soil. This will severely dent the Pakistan Army's image, which claims to be strong enough to tackle all threats to the country's security. Once its image is shattered, the army would have little justification to seek outsized budgets for national security; in fact, there may be calls for its restructuring and depoliticisation.

China is believed to have promised to roll over $4 billion in sovereign loans, refinance $3.3 bn commercial loans and provide an additional currency swap facility of $1.45 billion, thus giving total support of $8.75 billion, according to Pakistan Finance Minister Ishaq Dar. Whether it would agree to invest another $15-20 billion in various projects asked by the Pakistan government and on what terms is an open question. China will also be watching the deteriorating political situation in Pakistan as it would like a strong political consensus behind fresh large-scale investments in Pakistan (for instance, the Imran Khan government was keen on renegotiating several big projects).

Beijing is not only concerned at the mounting international pressure (backed by the USA) on Pakistan not to seek Chinese assistance at its terms; there are growing doubts about the ability of the Pakistan government to repay these new loans as it is unable to generate sufficient revenues, attract FDI or expand its exports. In the absence of the needed restructuring and reforms, the Pakistani government has only been seeking band-aid solutions (e.g. seeking foreign exchange deposits from friendly countries).

Consequently, Pakistan's financial situation is progressively worsening with mounting public debt, which has touched 87.2 per cent of the GDP in June 2022, consuming over 60 per cent of the tax revenues in debt servicing.

Given that China views its relations with Pakistan from a strategic and long-term perspective and has a vital interest in ensuring that Pakistan does not go bankrupt financially, China would continue providing essential financial support to Pakistan but might become reticent in giving large-size loans. It may encourage Pakistan to seek additional financial support from its friends in the West, Saudi Arabia and the UAE, which have closer ties with the Sharif government. Without a durable solution to the underlying problems, the choices available to Pakistan, including from China, would only get constrained, leaving few easy options for economic development.

(Yogesh Gupta is a former Ambassador who writes on foreign affairs)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.