South Asian nuclear power in a debt trap

By K.N. Pandita

It sounds ludicrous that Pakistan, a South Asian nuclear power, is caught in a debt trap and is beating every nerve to be bailed out. Amusingly, the debt trap is laid out by none other than a country which she proudly calls all-weather friend. Nevertheless, it is not the first time that Pakistan is faced with financial crunch. She has braved many such critical situations in the past and found a temporary solution that the country is faced with fiscal expertise deficit in borrowing loans to pay the loan instalments. The situation today is that economic growth has slowed down and sharply increasing fiscal imbalance is hindering the government to fulfil its developmental commitments to an increasing population.

According to a recent Bloomberg study, Pakistani rupee has been on the downslide since June 2017 losing more than 3.7 per cent value by the end of 2017. In December, the value of rupee against a US dollar was 105 but did not halt there and went up a steep rise reaching 119.84 in June 2018. This is a great shock to the macroeconomic situation as it has given rise to many more problems for the economy of that country. Standard Chartered PLC predicts that the rupee will fall to 125 per dollar by the end of the year and International Monetary Fund may request authorities to weaken it even further. As of third week of November 2018, a Pakistani rupee is valued at 132.81.

Foreign debt has reached nearly US dollars 95 billion. Debt servicing costs are crippling. Foreign exchange reserves are at almost the lowest level in the financial history of the country. Exports have dropped, and have the quantum of foreign remittances. Devaluation of Pakistani currency has increased inflation dramatically. Western think-tanks have made the observation that Pakistan economy presents the most dismal picture.

Why is Pakistan faced with economic crisis intermittently? Is it because of fiscal expertise deficit in the country? Is it because of not prioritizing production and export? Is it wide-scale loot of public exchequer by the invisible but privileged actors in and outside the government, or is it because of what is axiomatically called “a state within a state”, which is consuming the largest chunk of country’s annual budget. Commentators come out with numerous theories, practical or theoretical, but strangely they avoid unravelling Pakistan’s political-religious-military conundrum. Very few analysts are willing to dispassionately debate the financial impact of Pak army throwing out the elected governments and jumping into the seat of power under the oft-repeated pretext of setting right the derailed administrative machinery owing to large scale corruption by people holding public office. At the end of the day when military rule is withdrawn and power is restored to the civil society, we find more corruption and more irregularities committed during the martial law regimes. It is a different matter that the media cannot summon courage to spill the beans.

However, notwithstanding a political angle to the debate, let us come to the brass-tacks while examining the technicalities of the economic and financial crisis. It has to be remembered that developing countries have been taking loans from various international lending agencies. Pakistan is not an exception even though she has been a beneficiary in the past. The problem with which Pakistan has got stuck up now is of debt servicing, which has been accentuated by inflation and sharp decline in the value of rupee against dollar.


Writing in the Economic Leader of 4 August 2018, Gareth Heather argues that at the background to mounting and seriously increasing economic crisis is the ambitious and big infrastructure raising programme Chinese collaboration. Sandwiched between the world’s two giant financial powers, Pakistan has borrowed heavily from China and also from the Western world. She has taken out billions in Chinese loans and run up a huge Chinese-funded master plan to revamp its ports, roads, bridges and railways. A 62-billion dollar plan called China-Pakistan Economic Corridor {CPEC} running through the disputed regions of Gilgit and Baltistan and protested by India, has been celebrated by both countries as a long term investment that will increase trade. That is why China is financing ambitious infrastructure projects across Central and South Asia. Beijing considers these projects as ways to demonstrate its power besides securing allies.

Certainly, Pakistani economy needs to grow beyond rice and textile. That means building new infrastructures. But the question is that in pursuing the ambitious projects, China is pushing Pakistan’s deficits to unsustainable levels. Debts are rising rapidly while country’s hard currency is running out to pay its bills. As a consequence, Pakistan is left with no choice but to beg for monetary fund for a multi-billion dollar bailout which would be one of more than a dozen that Pakistan has received since 1980s. China is seeking new markets for its construction companies and new pathways to ship its goods. That is why she is financing ambitious infrastructure projects across Central and South Asia. Obviously, China views it as a way to project its power and secure allies. China claims that its loans do not have the same strings attached as the loans from various international lending agencies. This is not wholly true, and Pakistan is a standard example. Much of the profit from new power plants and rods goes straight back to Chinese companies. Another glaring example in this context is that of Sri Lanka. When Lanka could not pay back the money she had borrowed from China, she surprisingly, she showed extraordinary impatience in handing over Gwadar seaport to China. Sien Fenner, the lead Asia economist for Oxford Economics, a global research firm, made the cryptic remark that “Pakistan is clearly falling to the Chinese side.”

The CPEC is based on a $46 billion loan (now it $55 billion) that Pakistan has taken from China under Sovereign Guarantee. From the original allocation the $11-billion amount for infrastructure purposes is a Chinese loan whereas the $35-billion investment for the power sector. Infrastructure investments offered by China for CPEC is to be paid back as equity (ROE) which is guaranteed at either 17% or 20%.

A close examination shows the actual malpractice in CPEC Projects. With a substantial portion of the Chinese investments focused on power projects. The viability of the projects is based on interest rates charged by the China Development Bank and the China EXIM Bank. Official documents have revealed that with an estimated debt-equity ratio of 80%-20%, and these investments guaranteed a 17% to 20% rate of return in dollar terms on their equity (only the equity portion, and not the entire project cost). China will recover its investment in less than 26 months, and bleed Pakistan for the 25 year contract period. Not only that, such hugely expensive electricity will cripple their economy, making them a wheelchair case.


In comparison, global funding sources fundamentally focus on stabilizing the distressed economies and help countries avoid unsustainable financial imbalances. Loans are sanctioned with strict conditions to increase the chances that the country will clean up its finances and be able to pay back its loans.

Soon after Imran Khan took the reins of the new government in his hands, he was informed of critical financial situation into which the country had landed. The rhetoric of bringing accusations to the preceding regime resounded furiously for some days but recalling the tall promises made by the Pakistan Tahreek-I Insaf party (PTI) under the leadership of Imran Khan, the new government had no choice but to consider possible sources of raising loans running into billions. Three sources were identified (a) IMF, (b) friendly countries, and (c) Pakistani Diaspora.

An appeal to the people and the government functionaries to observe austerity in national interests or imploring Diaspora to accentuate foreign remittances can have only marginal response. The reason is the trust deficit which Pakistani governments have been generating among the Diaspora and also in a large section of citizenry at home. We may call it a gift of widespread corruption in the administrative structure as well as in the defence sector. Since in Pakistan power rests with the triumvirate of feudal lords, entrenched bureaucrats and Generals, it is very difficult for any government, especially the well-meaning one, to call the powerful to book. Even the parliamentarians seldom muster courage to table any motion aimed at probing the accumulation of enormous wealth by anyone of the triumvirate. Imran Khan did not touch on the subject of enormous monies stashed by Pakistani elite and highly affluent segment of society in foreign banks, especially UK or Switzerland.


Saudi Arabia is a close friend and benefactor of Pakistan. Imran Khan made two jaunts to Riyadh breaking his commitment made during election campaigns that for six months after taking into his hands the reins of the government he would not go on any foreign trip as a symbol of austerity measure. Deeply.

Notably more than ever before Saudi monarchy is careful not to antagonize the US at a point of time when it is faced with simmering discontent among a large section of its own people. Imran Khan’s second visit to Riyadh took place when Riyadh was in deep anguish about the murder of Khashoggi, the columnist of Washington Post. Trump administration had mounted pressure on Saudi Arabia to identify the culprits and bring them to book after Egypt held King Salman of Saudi Arabia responsible for the murder.

Saudi Arabia agreed to sanction a loan of 5 billion US dollars to Pakistan to bridge over the difficult financial position. It has to be remembered that no donor country gives loans without strings attached to it. We are not aware of the conditions of the deal between Pakistan and Saudi Arabia on a loan of 5 billion dollars but it has trickled down from Pakistani sources that King Salman has asked Imran Khan to mediate in the dispute Saudi has with Yemen. On his so-called triumphant return to Islamabad, Imran Khan announced that Pakistan will be ready to hammer out a deal to bring an end to the Gulf war.

There are two clear reasons why Pakistan agreed to make a mediation effort though a similar effort made earlier had ended in a fiasco. Firstly, Pakistan wants to get money immediately to restore the financial well-being of the country. Secondly, Pakistan had declined to join the Gulf Islamic Force that would have launched an attack on Yemen even when Pakistan permitted the services of retired army chief Raheel to be utilised to lead this force. This development had soured Pakistan’s relations with Saudi Arabia. But now Pakistan wants to restore traditional relations with the Saudi ruling house by agreeing to undertake the mediation mission despite knowing that the differences between the Saudis and Yemenis are so deep as to leave no scope for an amicable solution.

The US

Ever since the creation of Pakistan, the US took this country under its wings considering Pakistan a bulwark against the southward expansion of the communist ideology. The contours of this relationship began to show a change after the rise of Taliban in Afghanistan and Pakistan’s clandestine support to the Taliban. Since the US is directly involved in NATO+US engagement against the Taliban in Afghanistan, she has evidence to show that Pakistan is providing safe havens to the Taliban leadership, especially Haqqani network, on her soil and indirectly supporting their fight against the US in Afghanistan. The US demanded that Pakistan stop giving safe havens to the Taliban failing which she could take punitive measures. Instead of obliging the old ally and playing a responsible role, Islamabad stuck to its “denial” policy to the deep displeasure of President Trump. The result is the cancellation of 300 million dollars aid to Pakistan to meet the expenses for fighting the Taliban and their terrorist activities in Pakistan. Pakistan stubbornly opposed the American move. When Pakistan began approaching the IMF for sanction of about 11 billion dollars, Washington stepped in and warned the IMF seniors not to sanction loan in favour of Pakistan. The US is the largest donor of the IMF and naturally she has a say.

Pakistan’s frantic attempt to motivate IMF and prepare its mindset for considering the her request continues to be a burning issue but at least the IMF chief has hinted that Pakistan needs to put its house in order before approaching the IMF. Washington’s argument is that Pakistan will divert the loan money to pay the interest instalments to China which has stakes in Pakistan.


It will be noted that even China, too, told Pakistan to put its house in order and Pakistani financial authorities have conceded that there remains much to be done to provide crutches to her economy. Pakistan has nearly (in 2017) $72 Billion debt all together which is nearly 70% of their GDP which are not part of CPEC and Current Account Deficit is now raised to 120%. Even currently Pakistan has raised loans at 8.75% interest rate from I.M.F. by mortgaging Motor Ways, Air Ports, Radio & TV stations. To pay interest Pakistan is taking other loans to cover it and will reach alarming levels of bankruptcy. In Pakistan only 1% of the population is registered in the Tax System, and the Government collects just 9% of country’s wealth in taxes, which is the lowest in the world. This is the major cause why Pakistan Government is highly depended on loans.

To sum up, it may be said that low tax realization, endemic corruption and tax evasion, slide down of industrial growth owing to expensive energy resource, feeding the white elephant called Pakistan Army and spending around 9 billion dollars a year for purchase of arms with India-centric defence policy and patronizing terror – the Frankenstein of its own creation, all put together have dragged Pakistan to the brink of bankruptcy. To crown all this, the CPEC, which has been trumpeted as the game changer, is actually proving a canker eating into the vitals of the country. Experts say that even if the IMF sanctions a loan of 5-6 billion dollars that is not going to cure the ills of Pakistan as it needs anything to the tune of 20 billion dollars to overcome the crisis.
(The author is the former Director of the Centre of Central Asian Studies, Kashmir \University, Srinagar:

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