The China-Pakistan Economic Corridor (CPEC) has a complex and debated impact on Pakistan's debt, with differing perspectives presented in the sources.
Impact on Pakistan's Debt
CPEC involves massive investments, initially pledged at $46 billion and later ballooning to $65 billion or even higher estimates by Pakistani authorities, with a projected timeline extending to 2030. Some sources indicate that this has significantly contributed to Pakistan's rising debt burden.
Differing Perspectives on CPEC and Debt
There are two main perspectives regarding CPEC's role in Pakistan's debt:
CPEC as a "Debt Trap" or Major Contributor to Debt:
This perspective argues that CPEC has transformed Pakistan into an "economic vassal state" heavily reliant on Chinese capital and subservient to Beijing's strategic interests.
Loan Terms and Financial Risk:
The "investments" were often loans described as "steep, unforgiving, and increasingly unsustainable," with Pakistan bearing 80% of the financial risk.
High Interest Payments:
China is said to have provided these funds as "expensive commercial loans" with interest rates of 4% to 5%, meaning Pakistan pays over $3 billion annually in interest alone, plus principal, leading to an estimated annual outgo of about $6 billion.
Refusal to Restructure Debt:
Beijing has reportedly refused to restructure or defer payments, fearing it would set a precedent for other debtors. Consequently, Pakistan's interest payments consume 43% of its export revenues, one of the highest ratios globally.
Exploitation in Energy Sector:
In the energy sector, Chinese firms were allegedly guaranteed exorbitant dollar-denominated returns—some as high as 34%—whether or not the electricity was used, which became a "crushing burden" as Pakistan's currency depreciated.
Lopsided Revenue Sharing:
Gwadar Port, seen as a crown jewel of CPEC, operates under agreements where 91% of its revenue goes to Chinese state-owned enterprises, marginalizing local Pakistanis.
Delays and Costs:
High-interest rates on CPEC loans, rising project costs, weak projects, and attacks on CPEC infrastructure are cited as major issues, with many mega-projects still not started after years. There is growing frustration in both Pakistan and China over the slow progress and accumulating arrears. Some sources also suggest Pakistan has considered abandoning CPEC if the US provides similar financial assistance.
CPEC as Not the Primary Cause of Debt
This perspective contradicts the "debt-trap narrative," suggesting that CPEC's contribution to Pakistan's debt burden is minimal and that the country's debt issues are pre-existing and systemic.
Pre-Existing Debt Problems:
Pakistan's long-standing debt problems predate CPEC and stem from systemic issues such as stagnant economic growth, low revenue generation, and poor fiscal management.
Equity-Based and Concessional Financing:
A study indicates that 80% of CPEC initiatives are equity-based, placing a minimal debt burden on the government. The financing modalities for CPEC projects often include grants, concessional loans, and private investments, which are seen as contradicting the debt-trap narrative. For example, Gwadar's CPEC projects are primarily funded through grants, not loans.
Economic Opportunities:
CPEC still has the potential to significantly improve Pakistan's infrastructure, energy, and overall economic development. It is seen as a strategic economic corridor that could boost China's and Pakistan's economic stability, allowing for direct energy and goods transport from the Middle East, Central Asia, Europe, and the United States to China via Gwadar Port.
Need for Reforms:
To achieve sustainable development and solve its debt problems, Pakistan needs to implement fiscal reforms, improve governance, broaden its export base, and optimize CPEC's potential.
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