Sri Lanka is currently in throes of a vicious economic meltdown and it is essential to evaluate and compare the economic situation in Sri Lanka and Pakistan in the context of global economic crises that have ravaged developing nations.
Pakistan has large amount of debt, high inflation, a spike in unemployment and lot of other macroeconomic 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.
The import dependence of essential commodities, limited foreign exchange sources, restrictions on free trade and accumulated external debt are among the other alarming similarities between Sri Lanka and Pakistan.
From a critical point of view, China-Pakistan Economic Corridor (CPEC) is built on a $46 billion (now $55 billion) loan that Pakistan received from China as part of its sovereign Guarantee. The initial allocation includes a Chinese loan for $11 billion for infrastructure and an investment of $35 billion for the power sector.
China’s CPEC infrastructure investments must be recouped as equity, which is guaranteed to be about 20%.According to official documents, these investments were guaranteed a 17-20% of Rate of Return in dollar terms on their equity (only the equity portion, not the entire project cost), with an estimated debt-to-equity 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 might be crippled by such high costs, making it a wheelchair case.
China’s economic and political footprint has expanded rapidly all over the world and now even countries with comparatively robust economic and civil institutions, are struggling with the implications.
This is especially notable in two strategic regions, south Asia and Africa. China’s economic and political profile has grown remarkably in these two regions. However, countries in these region lack the institutional depth to evaluate the domestic implications of Chinese activism and policy recommendations.
Sri Lanka provides an historical illustration in this case. In a debt/equity swap, Sri Lanka has transferred Hambantota port, power plant and may transfer the airport to Chinese control because it is unable to pay off its debts to China. Additionally, debt service consumes 90 percent of Sri Lanka’s revenue.
Another example could be Venezuela, where China made the largest investment of any single country so far, investing $52 billion from 2008 to 2014.All Chinese loans to Venezuela were backed by commodities, and as a result, Venezuela was obligated to continue providing millions of barrels of oil to China helping Chinese economy to grow further.
In case of African region, Sub-Saharan Africa’s public debt has increased from 34% in 2013 to 53% in 2017. Major portion of Kenya’s $36.4 billion worth of external debt(as on June 2022) is from China. Kenya has already paid USD 972.7 million on Chinese debt so far and Kenya’s treasury projects, debt repayments to the Exim bank of China will raise to USD 800 million in the next financial year.
Kenya’s auditor general recently issued a warning that if the country defaults on loans from the China Exim Bank, it runs the risk of losing control of Mombasa port. The terms of a US$2.3 billion loan for Kenya Railways Corporation specify that the port’s assets are collateral, and due to a waiver in the contract, they are not protected by Kenya’s sovereign immunity.
China has provided 30 percent of Ethiopia’s total new public external debt over the past five years and China’s Exim bank has recently refused to release USD 339 million meant for Ethiopia's infrastructure projects.
The same can be applied to Pakistan, where the country’s total debt, which does not include debt from CPEC, is close to $72 billion, or close to 70% of GDP, and the current account deficit has increased close to 120%. With CPEC, the interest will be in the range of 7%, payable in 25 to 40 years, and Pakistan will be required to pay roughly 7-8 billion dollars as EMI for the ensuing 43 years, beginning in 2018 and so on. It appears impossible for the nation to pay back both the principle amount and such a hefty interest rate.
Other revelations are that the terms of contract in investment in CPEC are one-sided including the condition that no bid contracts against Chinese companies. Exemption from toll tax for Chinese vehicles and preference for Chinese workforce are some side perks.
No doubt, the CPEC has been a colossal entity in region, where China has been investing in infrastructure sector of Pakistan, but necessary measures may be taken at the earliest to avoid Pakistan going Sri Lanka’s way.
The latest developments has not only transmuted the region, generating a pool of jobs for locals but also purportedly offers the long term sustainable economic gains. The situation is however contentious in nature regarding the local concerns of Gwadar in Baluchistan.
People including local fisherman purveying the marine resources had been at risk of losing their livelihood because of Chinese investment in Gwadar. Moreover the locals had not been provided with a substitute for their loss of profession.
The recalcitrant behavior of locals is justified at their end but there’s another side of the coin which is more striking in its nature. The conduct of China’s in Sri Lankan projects shares a similar pattern which has been followed by Pakistan lately. The piled up foreign debt and shrinking foreign reserves is egregious to indulge in further loan programs which are required to proceed with CPEC project.
While these are enough signs to prove that Pakistan will go down the exact path shortly, the situation in Sri Lanka should serve as a warning to Pakistan’s upper echelons that financial and governance mismanagement could lead to a Sri Lanka like situation in its own backyard.
To resolve Pakistan’s monetary issues, the public authority ought to reconsider to settle the economy in a manner that wouldn't reserve its gains and political uprisings don’t plunge into societal strife.
In essence, Pakistan’s economic recovery and stability can only be sustained with the support of a broader dialogue and citizen engagement.
While projecting the bigger picture one can not deviate from the fact that China is one strong ally in region that Pakistan needs for both its sustained economic gains and political stability, but the foreign affairs echelons also bears the responsibility to generate a wide range of regional investors to help mitigate the eminent effect of debt trap of China, on the same patterns which resulted downfall of Sri Lanka.
This requires a cohesive national economic approach to set the patterns which allows Pakistan to engage with more than one economic partners.
The Shanghai corporation organization is also one such platform that safely vouch its members the opportunity to engage in enhanced cooperation, which Pakistan must seek.
Missing out the opportunity on Russian oil and Iranian gas would be a blunder. The potential to explore the enhanced trade routes with its neighbors would also be a good direction to help alleviate the poor conditions at ground level.
Eventually, it’s a matter of national interest and Pakistan shall take effective corrective measures to evade this precarious debt trap economic situation.
Muhammad Hamza Qamar is a columnist for Daily Parliament Times.