Could China’s AIIB loans deepen Pakistan’s economic woes?
China's overtures toward Pakistan are explicable in geopolitical terms, but Islamabad is already exposed to unsustainable levels of external debt
China’s offer of multibillion-dollar loans to Pakistan will ease the immediate pressure on Islamabad’s foreign-currency reserves in the face of steep current-account deterioration, a bulging trade deficit, and a likely US$1.7 billion cut in US Coalition Support Fund (CSF) financing.
A Chinese delegation from the Asian Infrastructure Investment Bank (AIIB) conveyed to Islamabad this month that the bank was ready to discuss further investments in the country to prop up its failing economy.
If they materialize, these will constitute China’s second-biggest venture in Pakistan after the $62 billion China-Pakistan Economic Corridor (CPEC), which includes an expected $33 billion to overhaul “transmission and distribution” in the country’s cash-starved power sector.
The AIIB is already co-financer of the M-4 Gojra-Shorkot Motorway and the Tarbela-V Hydropower Project, but its new plan for Pakistan takes its financial exposure in the country to new levels. Asia Times has learned that senior officials at Pakistan’s Ministry of Finance already have working papers for a number of projects that the AIIB will fund, among them Automatic Metering Infrastructure (AMI), at a staggering cost of $7.4 billion.
It merits a mention here that the Asian Development Bank (ADB) had already lined up $300 million to fund AMI in Pakistan and that the United States Agency for International Development (USAID) launched a five-year Power Distribution Program in 2010 that involved installing AMI networks.
At a time when indicators have shown Pakistan’s economy to be in a perilous state and drifting fast toward a default situation, the AIIB’s willingness to take over the financing of such infrastructure development projects is startling, particularly in light of the sums mentioned. And in terms of AMI, specifically, it remains to be seen how the bank will manage the risks involved in an endeavor that has previously failed because of technical hitches and resistance from a corrupt energy-sector mafia that is itself involved in power theft.
Reports indicate that the Automatic Meter Reading (AMR) systems installed on an experimental basis in selected areas of Punjab, Khyber Pakhtunkhwa and Sindh provinces have developed faults due to high temperatures and inconsistent specifications. Pakistan’s distribution companies have opposed AMR installation and have been uncooperative with suppliers.
Donor agencies have expressed skepticism about the capacity of Pakistan’s economy to sustain current levels of capital outflows on CPEC projects, and the new loans will further compound the situation
Against a backdrop of edgy US-Pakistan relations, observers give significance to China’s overtures toward Pakistan, which they see as being part of a strategy to mitigate US influence in South Asia. China hopes to secure a bigger role for itself in Afghanistan and Central Asia.
Pakistan’s mounting external debts, and debt-servicing liabilities, are already at an unsustainable level. Donor agencies have expressed skepticism about the capacity of Pakistan’s economy to sustain current levels of capital outflows on CPEC projects, and the new loans will further compound the situation.
The current government’s imprudence is unparalleled in Pakistan’s history. It has acquired some $20 billion in foreign debts over the last four years, including $10.1 billion obtained during fiscal 2016-17 alone. Total external debts are now approaching $80 billion.
Indirectly, the International Monetary Fund (IMF) – with which Pakistan agreed a $6.6 billion Extended Fund Facility (EFF) last year – revealed its concern with regard to the health of the country’s economy in early April. During an annual consultation meeting in Dubai, the IMF Board suggested a devaluation of Pakistan’s currency to “achieve greater exchange stability with a view to increasing falling exports”. The board also recommended fiscal consolidation through the implementation of key “structural reforms” to help improve the country’s external position.