Borrowed Pain: Pakistan Sinks Deeper into Chinese Debt Trap to Repay Loans from Other Nations
Borrowed Pain: Pakistan Sinks Deeper into Chinese Debt Trap to Repay Loans from Other Nations
With a fragile foreign exchange reserves base, Pakistan is forced to take loans to repay existing ones; otherwise, the country will face a balance of payments crisis.

It is payback time. Countries giving loans to Pakistan now want their money returned with the due dates having passed. But Pakistan finds itself in a bind because of its desperate economic situation, further exacerbated by the Covid crisis.

So, what is Pakistan actually doing? Going deeper in the loan cycle.

External debt and liabilities of Pakistan:

  • 2020 – $113.8 billion
  • 2019 – $106.3 billion

​Pakistan is borrowing from one country or agency or commercial institutions to pay off loans of another country or agency, mostly with Chinese help. A quick way for Pakistan to further fall into the Chinese debt trap. Take fresh Chinese loans to repay the loans from other countries.

For example, the UAE says now that the loan term has reached maturity, asking Pakistan to return $1 billion of the $3 billion it had borrowed in 2018. The Arab nation had announced $3 billion as oil credit facility but later withdrew it. Pakistan is requesting the UAE to roll over the amount as it is in no position to repay the loan right now and will be forced to take another loan to return this money.

Saudi Arabia wants its $6.2 billion back that it had extended in 2018. Out of the total loan amount, $3.2 billion was for oil credit facility and $3 billion as direct loan. Of this, Pakistan was forced to return $2 billion in two tranches and will soon have to pay back the last tranche of $1 billion. Pakistan requested China for commercial loans to arrange funds for this.

After the Covid-19 pandemic hit and with Pakistan’s poor history of repaying loans, softer borrowings or loans at a cheaper rate have become a near-impossible option for Islamabad and it is forced to take on commercial debt which is very expensive.

External public debt paid by the Imran Khan government in the past two years as revealed by State Bank of Pakistan data:

  • $3.593 billion – first quarter of this fiscal
  • $11.895 billion – 2019-20

According to the Express Tribune, a newspaper from Pakistan, the country has already taken loans worth $6.7 billion in the first seven months of this financial year. 41% of this is commercial loans with $500 million from China in January alone, and the ministry of economic affairs of Pakistan says these loans came at very higher interest rates.

The Chinese imprint on Pakistan’s economy can be seen by the fact that the gross foreign exchange reserves of the State Bank of Pakistan (SBP) of around $13.4 billion is with Chinese help only and largely consists of loans taken.

With a fragile foreign exchange reserves base, Pakistan is forced to take loans to repay existing ones; otherwise, the country will face a balance of payments crisis.

The pandemic has only exacerbated the deterioration of an economy that was already nosediving. As per World Bank estimates, Pakistan saw a negative GDP growth rate of 1.5% in 2020 while the country had seen a growth rate of 1.9% in 2019.

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