Sri Lanka is currently in the throes of a vicious economic collapse and it is essential to assess and compare the economic situation in Sri Lanka and Pakistan against the backdrop of the global economic crises that have ravaged developing countries.
Pakistan has a large debt, high inflation, soaring unemployment and many other macro-economic problems, which shows that the country’s economy is like a ticking time bomb. The factors that contributed to Sri Lanka’s economic crisis have also had a significant impact on Pakistan, whose economy faces similar challenges.
Dependence on commodity imports, limited foreign exchange sources, restrictions on free trade and accumulated external debt are among other alarming similarities between Sri Lanka and Pakistan.
Critically, the China-Pakistan Economic Corridor (CPEC) is based on a $46 billion (now $55 billion) loan that Pakistan received from China under its sovereign guarantee . The initial allocation includes an $11 billion Chinese loan for infrastructure and a $35 billion investment for the power sector.
Chinese investment in CPEC infrastructure must be recouped in the form of equity, which is guaranteed at around 20%. the total cost of the project), with an estimated debt ratio of 80% to 20%. China will recoup the cost of its investment in less than 26 months and bleed Pakistan for the next 25 years of contract duration.
The country’s economy could be crippled by such high costs, making it a case of a wheelchair.
China’s economic and political footprint has rapidly expanded around the world, and now even countries with relatively strong economic and civil institutions are grappling with the implications.
This is particularly notable in two strategic regions, South Asia and Africa. China’s economic and political profile has developed remarkably in these two regions. However, countries in these regions lack the institutional depth to assess the domestic implications of Chinese activism and policy recommendations.
Sri Lanka provides a historical illustration in this case. In a debt-for-equity swap, Sri Lanka transferred the Hambantota port and power plant and may transfer the airport to Chinese control as it is unable to repay its debts to the China. Moreover, servicing the debt consumes 90% of Sri Lanka’s income.
Another example might be Venezuela, where China has made the biggest investment of any country so far, investing $52 billion from 2008 to 2014. All Chinese loans to Venezuela were commodity-backed and, therefore, Venezuela was obligated to continue supplying millions of barrels of oil to China helping the Chinese economy to grow further.
In the case of the African region, sub-Saharan Africa’s public debt rose from 34% in 2013 to 53% in 2017. Most of Kenya’s external debt of $36.4 billion (as of June 2022) comes from China. Kenya has already paid $972.7 million on Chinese debt so far and Kenya Treasury Projects, debt repayments to China Exim Bank will increase to $800 million in the next fiscal year.
Kenya’s Auditor General recently issued a warning that if the country does not repay China Exim Bank loans, it runs the risk of losing control of the port of Mombasa. The terms of a $2.3 billion loan for the Kenya Railways Corporation specify that the port’s assets are collateral and that due to a waiver in the contract they are not protected by sovereign immunity from Kenya.
China has provided 30% of Ethiopia’s total new public external debt over the past five years and China’s Exim Bank recently refused to release $339 million earmarked for Ethiopia’s infrastructure projects.
The same goes for Pakistan, where the country’s total debt, which does not include CPEC debt, is close to $72 billion, or almost 70% of GDP, and the current account deficit has increased. by almost 120%. With CPEC, the interest will be around 7%, payable in 25-40 years, and Pakistan will have to pay around $7-8 billion as EMI for the next 43 years, starting in 2018 and and so on. It seems impossible for the nation to repay both the principal amount and such a high rate of interest.
Other revelations are that the terms of the CPEC investment contract are one-sided, including the condition that no bids are contracted against Chinese companies. Exemption from toll tax for Chinese vehicles and preference for Chinese labor are some secondary benefits.
Undoubtedly, CPEC has been a colossal entity in the region, where China has invested in Pakistan’s infrastructure sector, but necessary measures can be taken at the earliest to prevent Pakistan from following Sri Lanka’s path. .
The latest developments have not only transformed the area, generating a pool of jobs for locals, but also offering long-term sustainable economic gains. The situation is, however, contentious in nature when it comes to the local concerns of Gwadar in Balochistan.
People, including local fishermen supplying the marine resources, risked losing their livelihoods due to Chinese investments in Gwadar. Moreover, the inhabitants had not received a substitute for their loss of profession.
The recalcitrant behavior of the locals is justified on their side but there is a flip side of the coin which is more striking in its nature. The conduct of Chinese projects in Sri Lanka shares a similar pattern that has been followed by Pakistan in recent times. The accumulated foreign debt and dwindling foreign exchange reserves are glaring to indulge in other lending programs which are necessary to continue the CPEC project.
While these are enough signs to prove that Pakistan will follow the exact path shortly, the situation in Sri Lanka should serve as a warning to Pakistan’s higher echelons that financial and governance mismanagement could lead to a situation similar to that of Sri Lanka in its own backyard.
To solve Pakistan’s monetary problems, the public authority should reconsider the regulation of the economy in a way that does not reserve its gains and political upheavals do not plunge into societal conflicts.
Essentially, Pakistan’s economic recovery and stability can only be sustained with the support of broader dialogue and citizen engagement.
While projecting the bigger picture, one cannot deviate from the fact that China is a powerful ally in the region that Pakistan needs for both its lasting economic gains and political stability, but the ranks of the Foreign Affairs also has the responsibility of generating a wide range of regional investors. to help mitigate the eminent effect of China’s debt trap, on the same patterns that brought down Sri Lanka.
This requires a coherent national economic approach to define the models that allow Pakistan to engage with more than one economic partner.
The Shanghai Society Organization is also one such platform that safely guarantees its members the opportunity to engage in enhanced cooperation, which Pakistan must seek.
To miss the opportunity on Russian oil and Iranian gas would be a mistake. The ability to explore improved trade routes with neighbors would also be a good direction to help alleviate poor ground level conditions.
Ultimately, it is a matter of national interest and Pakistan will have to take effective corrective measures to escape from this precarious economic situation of the debt trap.
Muhammad Hamza Qamar is a columnist for the Daily Parliament Times.