Beijing tightens its grip on Islamabad

Did China convince Pakistan to pay $90 billion for China’s benefit?
Beijing tightens its grip on Islamabad

China's President Xi Jinping (right) shakes hands with Pakistan's Prime Minister Imran Khan ahead of their meeting in the Great Hall of the People in Beijing in November 2018. (Photo by Thomas Peter/AFP)

Anders Corr
Pakistan
January 14, 2019
The Financial Times revealed on Jan. 1 that China is planning a secret US$2 billion loan to Pakistan to avoid any future financial crisis in the South Asian country.

This is likely part of a total of $90 billion that Pakistan will pay China over the course of its debt-fueled infrastructure program.

The British newspaper got the scoop on the latest $2 billion from two senior government officials. The money is reportedly to increase foreign reserves and prevent more currency devaluations.

Pakistan media reports that the interest rate on the $2 billion will be 8 percent, below the central bank rate of 10 percent. But the loan's secret nature should raise the alarm for those concerned about Chinese political influence in Pakistan.

China is using the country's infrastructure development as an outlet for its own construction overcapacity, its ports for naval purposes and a new network of roads as a potential conduit for the goods of Western China.

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According to analysts paraphrased by the Financial Times, "by not publicly announcing its [$2 billion] offer to Pakistan, Beijing hoped to avoid further raising U.S. concerns over its relationship with Islamabad."

The proposed loan was likely secret to escape more Pakistani public resistance as well.

It is ordinary Pakistanis who are left holding the bill. They also incur increasing geopolitical risk as mounting Chinese loans effectively leverage Pakistan as a counterweight against democratic countries operating in central Asia.

 

Looking the other way

Pakistani military and intelligence elements reportedly support terrorist groups that operate against the United States, Afghanistan and India. One has to wonder — are they operating with the knowledge, or even at the behest of, China?

At the very least, China should be able to use its influence in Pakistan to encourage enforcement of the law against Pakistani terrorist elements. But there is little evidence that influence is being used for such positive purposes.

Instead, Pakistan is bending over backwards to support China even as it detains about one million Uyghurs in "re-education camps," according to testimony heard at the United Nations.

Uyghur children are reportedly being sent to orphanages when their parents are detained, and Han Chinese individuals are moving into Uyghur homes to ensure that Uyghur families comply with Communist Party requirements against too much religiosity.

There are an increased number of police stations in the Xinjiang region, where Uyghurs are concentrated, and Uyghurs must reportedly go through extensive security checks on the way to and from work, while individuals of the dominant Han ethnicity bypass security, including X-ray machines that could be harmful with repeated contact.

Chinese authorities claim that the measures are required to stop the growth of Islamic extremism, but human rights groups have decried the measures against the Uyghurs, and increasingly other Muslim populations in China, as a form of ethnic cleansing.

Pakistan's Foreign Ministry defended and minimized China's detentions in response to concern over the detention of up to 200 wives of Pakistanis. Some elements among the international media are overdramatizing the matter by spreading falsehoods, Foreign Ministry spokesman Mohammad Faisal said on Dec. 20.

China's policy of non-interference in the internal affairs of allies also leaves Pakistan's minority communities without a strong defender, and its influence in Pakistan is growing.

Supporters of the Muslim Uyghur minority in China step on a poster of Chinese President Xi Jinping during a protest to denounce China's treatment of the Uyghurs in front of the Chinese consulate in Istanbul in July 2018. (Photo by Ozan Kose/AFP)

 

More deeply indebted

The latest $2 billion loan is part of China's debt-driven $62 billion infrastructure program in Pakistan.

Interest payments to China will add another $28 billion, making Pakistan's payments to China over time reach a total of $90 billion.

Pakistan's central bank governor had to complain publicly in 2015, and lobby for months more, before he got detailed access to information on Pakistan's growing debt to China.

Still, he discovered, feasibility studies and cost benefit analyses were lacking. He is now in retirement as Pakistan's leadership seeks to borrow additional sums.

How unfortunate that the temperate and honest voices in government are those so frequently drummed out of state bureaucracies.

The building loans raise questions as to why Pakistan's top leaders continue to accept debt from China, and whether they were paid bribes as happened in the CEFC China oil development case, in which Patrick Ho was convicted for attempting to bribe government leaders in Africa.

The Pakistani infrastructure program, called the China-Pakistan Economic Corridor (CPEC), will arguably help China more than Pakistan. But it will also help Pakistan's military establishment, which according to The New York Times, "stands to fill its coffers with millions of dollars through CPEC as the military's construction companies win infrastructure bids." The loser in this situation appears to be the average Pakistani citizen.

Pakistan's broader economy is in a shambles, in no small part because of CPEC.

The country has an overall debt burden of $215 billion. Its current account deficit is skyrocketing as construction imports, including for CPEC, exceed exports.

Its currency has lost a fifth of its value versus the dollar since late 2017.

Pakistani companies cannot pay even the operating costs, much less high debt repayments, of at least one CPEC power station.

Pakistan's dwindling foreign reserves are only $7.3 billion, sufficient to cover just a month and a half of imports.

The government has sought to improve tax collection, divert too much Chinese investment from power and infrastructure to industrialization, agricultural and education, and has a "Make in Pakistan" initiative that includes government subsidies to manufacturing and decreased customs duties.

Unilever, Coca-Cola, Telanor, Suzuki and ExxonMobil are investing. The country is in discussions to improve export access to Chinese, Indonesian and Malaysian markets. But these efforts are far too little, too late. And some of them, like more tax collection, will have a cost for the average citizen.

Pakistan is surviving year to year on international loans whose interest rates are climbing.

Fitch again cut Pakistan's already junk debt rating further in December. China lent $4 billion to Pakistan in the fiscal year ending June 2017. Saudi Arabia and the UAE pledged $9 billion in the fiscal year ending June 2019.

In December, Pakistan's cabinet approved up to $1.2 billion in additional debt from China in renminbi-denominated loans.

These panda bonds will only be useful in purchasing Chinese goods and services, so again will primarily benefit China rather than Pakistan.

 

Closer military ties

In a country with a GDP per capita of only $1,548, many of Pakistan's planned panda bonds could go to its recently announced purchase of four of China's advanced missile frigates.

China's state media announced that the arms deal was meant for the balance of power in the Indian Ocean, which also serves China. Why should China spend money and incur risk to militarily balance India when Pakistan will pay China for the privilege?

Pakistan is also cooperating with China on a secret plan to expand its existing production of China's JF-17 fighter jets, to a new generation of fighters, plus other military hardware under CPEC, according to The New York Times.

This may provide some export revenues to Pakistan, but it is shifting Pakistan's military dependence and supply chain from the U.S. to China.

Compounding the dependency, Pakistan hosts Chinese satellite stations, and is the only other country that has access to the military functions of China's Beidou satellite navigation system.

In 2015, China managed to outsource more of its defense to Pakistan. The cash-strapped country bought eight Chinese submarines for $6 billion.

Some of the fueling and maintenance infrastructure that Pakistan requires for the submarines will also be useful to China's own submarine force, which seeks to project naval power to India, China's military base in Djibouti and beyond.

At least some of these military projects are part of China's $1 trillion One Belt, One Road (OBOR) infrastructure initiative.

The global project spans 70 countries and was previously promoted by China as purely economic, rather than military, development.

Defense analysts, however, have linked China's infrastructure initiative to providing China's navy with greater access to recipient country ports and political leadership.

Pakistan's CPEC is China's flagship OBOR program, and the Gwadar port, developed from almost nothing by China in the far west of the country at a cost of $800 million, is again more useful to China than to Pakistan.

It will serve as a Chinese naval outpost and for easier trade from China's western region through the Arabian Sea. China and Pakistan have sought to keep the terms of the port lease to China, and its 40-year length, from Pakistani public scrutiny.

A multi-roll fighter aircraft, the JF-17 Thunder, built by Pakistan with the assistance of China, is painted with the Pakistani and Chinese national flags. (Photo by Aamir Qureshi/AFP)

 

Answers sought

But the public is demanding answers. Pakistani Prime Minister Imran Khan promised on the campaign trail before the July 2018 election to reveal details of the $62 billion CPEC program to the public.

After three months in office, including a November visit to Beijing, he has not done so. He also backtracked on a deal with the International Monetary Fund (IMF), rolled back an invitation for Saudi Arabia to join CPEC, and stopped discussing the cancellation of Chinese infrastructure projects.

China does not want to compete with Saudi Arabia, or any other country, for its infrastructure bids. Sole source contracting is illegal and unethical in most ethical acquisition processes.

Islamabad is nevertheless boldly seeking another $7 or $8 billion in loans from the IMF, down from a request for $12 billion made in September. China holds much influence on the disbursement of such loans, but so do the U.S., Japan, and Europe. U.S. Secretary of State Mike Pompeo warned the IMF last July against another large loan to Pakistan, which will likely pay off China's bad debt in the country.

China's lending burden would then transfer to the rest of the international community and incentivize further self-interested international loans by Beijing. 

While the IMF would be justified in rejecting the proposal in a peremptory manner, it is negotiating.

The IMF demanded full transparency of Pakistan's past agreements with China, and the chance to participate in future CPEC negotiations, as a condition for further loans.

Those are good demands, but better yet would be to reject the proposal altogether. Pakistan's debt is now junk-rated because of China, so China should bail the country out, leaving the rest of the world intact. Or Pakistan should selectively default on Chinese debt.

There should be consequences for self-interested and profligate lending to countries that cannot then repay.

Not insisting on this consequence for China will increase a moral hazard in which China and recipient countries are incentivized to agree to increasing debt with the understanding that the IMF will take care of the inevitably painful payments.

Regardless of whether the proposed IMF loans to Pakistan get approved, IMF proposals to reduce Pakistan's state-owned sector through job cuts will likely be required for fiscal reasons.

That increases political instability in a country that already suffers from a lack of revenue sources. Less than 1 percent of Pakistan's population pays income tax, in part because poverty is widespread.

Pakistan is nearly insolvent, and falling under the economic and political influence of China.

That explains a lot of Pakistan's anti-social behavior towards the U.S., Afghanistan and India, and puts the volatile nuclear-armed country, and the region, into a very dangerous position.

The citizens of Pakistan, and the international community, need to think outside the box, and quickly, to extricate the country from China's grasp.

Anders Corr holds a Ph.D. in Government from Harvard University, and has worked for U.S. military intelligence as a civilian. He frequently appears in the media, including Bloomberg, 'Financial Times,' 'New York Times' and 'Forbes'.

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