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Imran Khan’s Rage Against Beijing

By Ichiro Suzuki  Pakistan was a major non-NATO U.S. ally until the early years of the 21st century. In 2002 the United States allowed for the release of $25 billion of aid to Pakistan. The U.S. aid in the aftermath of the Kashmir earthquake of 2005 was well received by the Pakistan public. The bilateral relationship began to turn sour as the War on Terror progressed, and persisted. The 2011 killing of Osama bin Laden on Pakistan soil by the U.S. SEAL’s covert operation deteriorated the bilateral relationship that had already been under considerable strains. In the mean time, Pakistan became drawn closer to China as the Communist Party became increasingly generous in handing out cash to Pakistan along with other developing countries. In the last decade, Pakistan in particular became the cornerstone of the Belt & Road Initiative (BRI), whose major feature was connecting East Asia and Europe on land transportations. In 2015 the China-Pakistan Economic Corridor (CPEC) was announced, and the promised sum soon topped $60 billion. Pakistan is China’s only real ally on the vulnerable front, or perhaps a client state, in part as a result of Islamabad’s souring relationship with Delhi and Washington D.C. As are often the cases with other BRI aid recipients, Pakistan has not been known for its prowess of managing the country’s finances. As soon as Imran Kahn rose to power in 2018, he had to ask the IMF for a $6 billion bailout amid a balance of payment crisis. It was almost 2% of the country’s economy. Then two years later, Pakistan has found itself too heavily indebted against China, along with other debtor countries. It is estimated that Pakistan owes approximately $7 billion to China. Recently, Pakistan is unhappy not only about the size of the debt it owes to China but also the way it has grown this large. The Financial Times reports that Mr. Khan, who campaigned attacking the corruption of CPEC on his way up to the prime-ministership, is protesting that Chinese companies are overcharging Pakistan on power plant projects by as much as $3 billion over 30 years on set-up costs and interest payments. While infrastructure projects on foreign aid in general often lack transparency, BRI projects are especially notorious about their opacity. In the absence of even a semblance of competitive bidding, Chinese companies are not incentivized to scrutinize the project’s cost, feelIng almost free to charge the client what they believe are reasonable costs, with some profits added. Even Without bad intentions, this promotes cost overruns. Interest rates on BRI projects are market based, as opposed to below-market rates charged by bilateral lenders, i.e. the World Bank and the IMF.  On top of it, Chinese contractors bring in loads of fellow Chinese workers into the projects thus limiting job opportunities for local people. At the completion of a project, aid-recipient countries are handed shiny new roads, railroads, dams, power plants, etc, but with costs that may or may not be reasonable, and with smaller economic effects than had been hoped for. Hearts and souls of local people cannot be won this way. A system of driving these countries into so indebted that they would have to yield to the creditor is a new form of economic imperialism. While PM Khan wants to renegotiate the term of the power plant project, Islamabad’s probe into the project has been suspended under the pressure from Beijing.  Beijing has recently announced suspension of payments for 2020 that 77 countries owes China. While this is a tiny step forward, this hardly looks an act of generosity. Whereas accumulating that much debt is primarily the fault of the debtor countries, the lender is obviously blameless at a time when so many of them are so drowned in debt that they really struggle to pay back. This is not the first time these debtors are so hopelessly indebted. In their past experiences, however, the bulk of what they owed was forgiven by the Paris Club, a group of officials from major creditor countries from North America, Europe and Japan. In concert with the Paris Club’s action, multilateral lenders agreed to forgive what debtors owe them. With a major part of their debt coming from China that is outside of the Paris Club, multilateral lenders usually do not move. If the World Bank and the IMF go ahead and write off the loans to the debtors, they would be indirectly financing China’s debt collection. Therefore, they would in principle be reluctant to forgive what they have lent. China would have to make a move to solve the new emerging countries’ deep debt problem. Perhaps, it could take the entire 2020s, as the Latin America spent the whole decade to be relieved of their 1980s debt crisis. (This spring the IMF’s executive board approved relief on 25 countries’ debt service as these countries face a crisis caused by coronavirus. This move is considered rather an exception attributed to the pandemic. The principal they owe the IMF continues to stand.)

About the author: Mr. Suzuki is a retired banking executive based in Tokyo, Japan.

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