AidData, a global development research lab housed at William & Mary’s Global Research Institute, recently revealed a slew of fresh results about China’s ambitious foreign development finance scheme. The study, which is based on a vast new dataset that took four years to create, has a special emphasis on China’s Belt and Road Initiative (BRI). The research lab documented the “Banking on the Belt and Road” report that gives the reader an overview of China’s geoeconomic strategy prior to and during the introduction of BRI in 2013. This report has special relevance for lower- and middle-income countries (LMIC) like Pakistan because it encompasses 13,427 projects across 165 nations totalling $843 billion; the majority of them belong to LMIC’s class.
Pakistan entered into the flagship program of BRI, which is currently underway in different parts of the country and is commonly known as the China Pakistan Economic Corridor (CPEC). The insights from this report are creating a precarious picture for host countries due to the explained expenditure patterns and debt levels against them. Pakistan topped the list, according to the report, with projects worth $27.3 billion during the period studied. Additionally, Pakistan was ranked second in the report’s chart illustrating the progress of BRI projects. Version 2.0 of AidData’s Global Chinese Development Finance Dataset report contains information on 26 CPEC-related projects in Pakistan. It includes eight projects related to energy, four related to transportation, one related to communication, three related to education, two pertaining to banking and financial services, one related to reconstruction and rehabilitation, and two projects related to government and civil society. The details regarding interest rates and loan types, and repayment terms are illuminating for the current government, as CPEC was signed with Chinese counterparts during the Pakistan Muslim League-Nawaz (PML-N) government.
AidData report serves as a test and an opportunity for the current government to make all details related to the CPEC projects publicly available. When it comes to updating factual details and databases, the government’s resources are not up to the mark.
Since the start of this multibillion-dollar investment project, Pakistan Tehreek-e-Insaaf (PTI) has questioned the CPEC projects’ terms and conditions. The concerns are legitimate given Pakistan’s obligation to repay all funds to funding and implementing agencies. However, it has been noted that while the PTI is in power, no clear plan has emerged to ensure or demonstrate the CPEC project’s transparency. The report revealed that the Karot Hydropower project’s interest rate is 5.11% at the amount of $1.3 billion. It further describes that China Three Gorge South Asia Investment Limited (C-SAIL) holds 93% ownership stakes in Karot Power Company Limited (KPCL), and Pakistan Associates Technologies has 7% stakes in KPCL. Details of such a huge developmental project, like in the AidData report, are still missing on the official websites of government resources in Pakistan. It raises a big question on the transparency of the CPEC projects.
Moreover, a typical loan from China has an high interest rate of 4.2% and a repayment duration of fewer than ten years, which is considered less compared to other international donor consortia like the Organisation for Economic Co-operation and Development – Development Assistance Committee (OECD-DAC). A typical loan from an OECD-DAC lender such as Germany, France, or Japan, has an interest rate of 1.1% and a repayment period of 28 years, compared to the above. Such comparisons in the published report are sufficient for the federal government and policymakers in Islamabad to evaluate their signed or prospective projects with China.
According to the International Monetary Fund (IMF), Pakistan’s external debt had ballooned to $90.12 billion by April 2021, with Pakistan owing 27.4% — $24.7 billion — of its total external debt to China. According to the report, the burden of hidden and sovereign debts will be a major source of concern for Pakistan in the foreseeable future. The accumulation of both would result in a downward spiral of financial trapping that can keep our assets tied to the Chinese economy.
The Sachal Wind Farm Project supports the report’s revelations about the CPEC hidden debt phenomenon. The project cost $134 million and was signed between an Independent Power Producer (IPP) from China and Sachal Energy Development Pvt. Limited (SEDPL), which is a special purpose vehicle. Another example of hidden debt is the orange line project being completed in Lahore, but still, information related to its rate of interest and repayment period is not given on the official sources. This project, which is being built as a joint venture between China Railway Corporation and China North Industries Corporation and is being funded by the Export-Import Bank of China, is a component of the CPEC. Therefore, technically, debts do not appear on the balance sheets of their respective governments because their private bodies are involved, like SEDPL. Although most benefit from explicit or implicit host government liability protection, this has eventually blurred the line between private and public debt, posing significant challenges for Pakistan’s ability to effectively manage its public financial resources.
In a nutshell, the AidData report serves as a test and an opportunity for the current government to make all details related to the CPEC projects publicly available. When it comes to updating factual details and databases, the government’s resources are not up to the mark. On a governmental level, it is critical for officeholders to thoroughly examine the feasibility of a project and the project framework before moving forward with the implementation stage. The chances of being trapped in unfair interest rate terms and conditions are reduced due to this practice. The government can be confident that signatory parties from both sides will make their balance sheets available throughout the period of capital inflow and repayment, which will allow it to regulate hidden debt in CPEC projects. It will contribute to lessening the burden of hidden debt on Pakistan’s financial system, which will be beneficial. If this is done, it will assist in providing the necessary information to the World Bank’s Debtor Reporting System (DRS). Otherwise, because Pakistan’s central government institutions will not be the primary borrowers responsible for repayment, the overall authenticity of the financial system at the international level will be compromised, which is not promising for other investors to come to Pakistan. Additionally, it is prudent to keep and publicise all details of CPEC projects on an indigenous basis, as this would enable the country to avoid future reliance on foreign resources such as AidData.