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22 June 2022, Indian Express

Understanding Pakistan’s China Debt Problem

Pakistan’s latest economic survey reveals the extent of the country’s indebtedness to China. High-interest Chinese loans, reckless multilateral borrowing, and ever-increasing defence budgets have deleteriously impacted Pakistan’s finances. Any lasting solution to these problems will have to involve China.

Senior Fellow, Energy, Investment and Connectivity

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Pakistan’s latest Economic Survey (2021-22) throws up interesting data on the country’s economic ties with China. More specifically, it gives a glimpse of just how deeply Pakistan is indebted to China. Pakistan has a current debt of $87.7 billion outstanding. Its ongoing economic crisis – devalued currency, double digit inflation and weak balance of payments which have also precipitated a political crisis – can be traced to its reckless borrowing, enabled by China. Meanwhile, even as the country risks a financial crisis, the military has awarded itself an 11% increase in budgetary allocation (in Pakistani rupees), while other heads such as Education, Housing and Health have seen their budgetary allocations cut sharply. This created an unprecedented (for Pakistan) backlash against the Pakistani military, and the military has tried to justify its budgetary allocation – not something witnessed in ‘normal’ states.[1]

Given the role Chinese lending has played in the crisis in Pakistan and Sri Lanka, other lenders are coming around to the view that China must also take some of the haircuts and burden of debt relief to these countries directly. Funds from IMF – which Pakistan is in negotiations with for its 22nd loan – and other aid providers shouldn’t be used to repay opaque loans made on unfair terms.

China is Pakistan’s largest bilateral creditor, with outstanding loans of $14.5 billion – only the ADB ($14 bn) and the World Bank ($18.1 bn) have comparable amounts outstanding (Refer Table 1).

However, this number undercounts the true extent of Chinese lending to Pakistan under other categories. For instance, China’s SAFE – State Administration of Foreign Exchange – has lent      to Pakistan.[2] The Economic Survey lists $7 billion owed to SAFE/TIME (Not clarified in the budget documents), which likely includes loans extended by SAFE.

Pakistan also owes $8.77 billion to ‘commercial banks’, which includes banks from West Asia and three Chinese lenders – Bank of China, ICBC and China Development Bank, all state-owned banks. Between 2016-17 to 2020-21, the three Chinese lenders extended short term loans worth $11.48 billion to is not clear how much of this amount is still outstanding.

Table 1: Pakistan’s Public Debt (31stMarch, 2022)
Lender Amount Outstanding ($ mn)
Paris Club Countries 9,708
–          Japan 4,632
–          Germany 1,598
–          France 1,299
China (Bilateral) 14,503
SAFE/TIME Deposit (China?) 7,000
ADB 14,028
WB (IDA + IBRD) 18,149
Commercial Banks 8,770
Total Borrowings 87,359
Undisbursed Debt 17,762
Source: Pakistan Economic Survey 2021-22

The absolute amounts also don’t capture the different interest rates and tenures –most of the multilateral loans (ADB and WB) are for 25-30 years and have been made at much lower rates (Libor + 0.6%), while loans from Chinese ‘commercial banks’ are for shorter tenures (1-3 years) and at higher interest rates (Libor + 2.75%-3%). This means that while ADB/WB lending is around 3%, loans made by Chinese banks are 5.5%-6% at present rates.

This difference also extends to bilateral lending. Compared to other bilateral lenders such as France, Germany and Japan, China’s loan tenures are shorter and interest rates higher (Refer Table 2). This means that while bilateral loans from Germany, Japan and France charge an interest of under 1%, bilateral loans from China are at interest rates of 3-3.5%.

Table 2: Selected Loans contracted by Pakistan during 2020-21
  Loan Amount (US$) Interest Rate Duration Years
Bilateral Lending      
France 32.1 Fixed 0.75% NA
Germany 77.3 Fixed 0.25% 40
China 1,000 12-month Libor + 1% 1
Multilateral Lending      
ADB 900 Fixed 2% and 6-month Libor + 0.6% 15, 25
IDA WHAT’S THIS 3,633.6 Fixed 2% 30
Commercial Lending      
China Development Bank 1,000 12-month Libor + 3% 1
ICBC 1,300 3-month Libor + 2.75% 2
Dubai Bank 825 12-month Libor + 2.05% 1
Source: Pakistan Economic Survey, 2021-22

The higher interest rates become evident when viewed along with at Pakistan’s interest payments to its creditors. During 2019-20, the total lending to Pakistan by Paris Club Countries and China was about the same – but the interest outflow on Chinese loans was four times higher (Refer Table 3). In the past two years, Pakistan has paid out just $7.6 million in interest to the Paris club – likely relief on account on the pandemic, while it has paid out over $400 million to China as interest.

Table 3: Pakistan’s Loan Repayments: Paris Club vs China (US$)
    2019-20 2020-21 2021-22 (9M)
Paris Club Members Total Loans 10,786 10,438 9,708
Principal Repayment 353.8 9.1 40.6
Interest Repayment 110.7 1.4 6.2
China Total Loans 10,777 14,180 14,503
Principal Repayment 421.6 135.5 385.7
Interest Repayment 450.8 169.8 234.8
Source: Pakistan Economic Survey, 2021-22

It is likely that a significant part of the Chinese lending has been for the China-Pakistan Economic Corridor, an ambitious project being undertaken on opaque terms. According to Pakistani media reports, the IMF wants Pakistan to renegotiate the CPEC energy deals before IMF agrees to assist Pakistan.[3] Earlier work done by Gateway House has shown that some of the loans made for CPEC Power projects were at Libor + 4-4.5%, and the cost of projects was significantly higher than similar projects elsewhere.[4]

Any lasting solution to the problems of these countries will have to involve China. It will have to chip in, in the form of lower interest rates, extended repayment periods and some debt forgiveness, if Pakistan and others like Sri Lanka, Maldives and Myanmar are to climb out of the financial hole they are currently in.

If China refuses to help solve a problem it has helped create, other lenders may also refuse to contribute – why write off money which will then be used to pay off a single lender at everyone else’s expense? However, if China does write off some of its loans, it will face similar      demands from other borrowers who had signed up for the BRI. From a narrower Indian perspective, the Chinese debt trap will limit Pakistan’s economic growth, in turn reducing its ability to cause mischief for India.

A version of this article was first published in The Indian Express.

Amit Bhandari is Senior Fellow, Energy, Connectivity and Investment  Studies Programme, Gateway House.






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