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IMF Won’t Stop China From Turning Pakistan Into The Next Sri Lanka

Panos Mourdoukoutas

Panos Mourdoukoutas 

A $6 billion loan approved from the International Monetary Fund this week will ease Pakistan’s debt problems, for now. But it won’t stop China from turning the country into the next Sri Lanka.

China has been very close to Pakistan in recent years, for a couple of reasons. One of them is that Pakistan is a “natural” ally in Beijing’s long-time efforts to contain India.

The other reason is that Pakistan offers a “natural corridor” between western China and the Indian Ocean, and, therefore, an alternative route to Middle East oil supplies and the riches of Africa.

Pakistan Underperforms Emerging Markets
Pakistan underperforms emerging markets

That’s why Beijing has been helping Pakistan build the China Pakistan Economic Corridor (CPEC), which stretches from Western China to the Indian Ocean.

While CPEC benefits China, this project benefits Pakistan too. It’s a big leap forward, as the country strives to transition from an emerging to a mature economy, creating a lot of jobs in the process.

But China’s involvement in the project hurts Pakistan, too. It adds to Pakistan’s corruption, since it involves state owned companies on both sides of the partnership.

Pakistan's Corruption Index
Pakistan’s Corruption Index

Meanwhile, corruption keeps pushing the costs of the project higher by the day.

As of 2019, the cost of CPEC projects is $62 billion, up from the original value of $46 billion back in 2014.

And that makes Pakistan more indebted to China, which has been financing the project. In fact, Pakistan’s external debt took off shortly after CPEC was launched.

Growing indebtedness comes at a time when the country is already living beyond its means, as evidenced by persistent current account deficits, government debt, and external debt.

Pakistan vs Sri Lanka Key Economic Metrics

Country/MetricPakistanSri Lanka
GDP$312.57B$88.90 billion
GDP Annual Growth5.2%3.70%
Current Account to GDP-5.8%-3%
Government Debt to GDP72.5%82.9%
Foreign Currency Reserves$14950.10million1085177 LKR Million
Government Debt to GDP-6.6%-5.3

Source: Tradingeconomics.com 2/4/2019

Pakistan recorded a Current Account deficit of 5.8% of GDP in 2018, according to Tradingeconomics.com. The country’s Current Account to GDP averaged -2.35% from 1980 until 2018, reaching an all-time high of 4.90% in 2003 and a record low of -8.50% in 2008.

Pakistan accumulated a government debt equivalent of 72.5% of GDP in 2018, up from to 67.20% in 2017. The country’s government debt to GDP averaged 69.30% from 1994 until 2018, reaching an all-time high of 87.90% in 2001 and a record low of 56.40% in 2007.

Pakistan’s external debt jumped to 105841 USD Million in the first quarter of 2019 from 99086 USD Million in the fourth quarter of 2018.The country’s external debt averaged 53029.34 USD Million from 2002 until 2017, reaching an all-time high of 88891 USD million in the fourth quarter of 2017 and a record low of 33172 USD million in the third quarter of 2004.

Meanwhile, Pakistan’s foreign currency reserves and foreign capital flows have been falling rapidly.

That’s why the country had to appeal to China and Saudi Arabia for loans to deal with the situation. But these funds haven’t been sufficient to ease Pakistan’s Current Account crisis so the country had to appeal to IMF for the $6 billion loan.

The trouble is that the CPEC project is far from over, and the costs of completing it keeps on rising.

And that makes it very likely that Pakistan will have to reschedule its debt several times before it’s over, and share the same fate with Sri Lanka — swapping debt with equity, which in essence will hand CPEC to Beijing.

That’s the model China used in rescheduling Sri Lanka’s debt, turning the country’s Hambantota port officially into China’s own port, for 99 years. A milestone deal signed early last year gives China Merchants Ports Holdings—an arm of the Chinese government—70% stake in the Indian Ocean’s prominent outpost.

Like CPEC, the Hambantota port construction began with loans from China. But when Sri Lanka could not repay the loans, Beijing converted these loans to equity, in essence turning Sri Lanka into a “semi-colony,” in a subtle way.

That’s what will eventually happen to Pakistan when China assumes ownership and control of CPEC, and collect tolls from vehicles that pass through.

Panos Mourdoukoutas

Panos Mourdoukoutas Contributor

I’m Professor and Chair of the Department of Economics at LIU Post in New York. I also teach at Columbia University. I’ve published several articles in professional journals and magazines, including Barron’s, The New York Times, Japan Times, Newsday, Plain Dealer, Edge Singapore, European Management Review, Management International Review, and Journal of Risk and Insurance. I’ve have also published several books, including Collective Entrepreneurship, The Ten Golden Rules, WOM and Buzz Marketing, Business Strategy in a Semiglobal Economy, China’s Challenge: Imitation or Innovation in International Business, and New Emerging Japanese Economy: Opportunity and Strategy for World Business. I’ve traveled extensively throughout the world giving lectures and seminars for private and government organizations, including Beijing Academy of Social Science, Nagoya University, Tokyo Science University, Keimung University, University of Adelaide, Saint Gallen University, Duisburg University, University of Edinburgh, and Athens University of Economics and Business. Interests: Global markets, business, investment strategy, personal success.

Source: FORBES

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