Pakistan’s fresh £580m loan from China intensifies debt burden fears

China has agreed to loan Pakistan $700m (£580m) to help it weather its worst economic crisis in a generation, in a development that will intensify concern among western countries about cash-strapped Islamabad’s debt burden to Beijing.

The loan comes on top of $30bn (£25bn) that Pakistan already owes China and Chinese commercial banks. Securing the financing will help to unlock bailout cash from the International Monetary Fund (IMF).

The news of the loan from ​​the state-owned China Development Bank came the day after Pakistan’s National Assembly unanimously passed a money bill to increase tax revenues. The IMF has said Pakistan must comply with certain requirements, such as raising taxes and securing external funding, if it is to release $1.1bn (£900m) of bailout funds, part of a $6bn (£5bn) package agreed in 2019.

Pakistan’s foreign debts amount to about $100bn (£83bn), meaning that the share owed to China is just under one-third. But China is Pakistan’s biggest single creditor and tends to charge relatively high interest rates compared with multilateral lenders.

Last year the country was hit by devastating floods that cost an estimated $30bn in damage and lost output. Since then the war in Ukraine, which has sent food and fuel prices soaring, as well as years of domestic economic mismanagement, have crippled Pakistan’s economy. As of 10 February foreign reserves were down to just over $3bn (£2.5bn), barely enough to cover three weeks of imports.

In the week ending 16 February, inflation for core goods, such as cooking oil, vegetables and fuel, hit 38.4%.

Pakistan’s economy is on a “suicidal path”, says Zubair Khan, an economist and former IMF official. “Our government is pursuing the wrong policies and the IMF programme is aggravating the situation.” He believes the increase in taxes requested by the IMF will worsen Pakistan’s balance of payments crisis.

On a visit to Islamabad last week, Derek Chollet of the US state department said: “We have been very clear about our concerns not just here in Pakistan, but elsewhere all around the world about Chinese debt, or debt owed to China.”

But Khan believes corruption and mismanagement are to blame for Pakistan’s economic woes, not China. “We owe a lot of money to the Chinese because they’re the only ones who have been investing here,” he said.

On Friday G20 finance ministers and central bank governors will meet in Bengaluru in India. The US treasury secretary, Janet Yellen, will press China to offer debt relief to low- and middle-income countries. India is also drafting a proposal for large lenders, including China, to take a haircut on loans, according to Reuters.

But China, the world’s largest sovereign creditor, has historically been reluctant to restructure loans, preferring instead to extend new credit. China is wary of taking such a step because of the precedent it would set to its other debtors, says Andrew Small, a senior fellow at the German Marshall Fund of the United States and author of a book on China and Pakistan.

But Small also noted China might be more willing to support Pakistan than other debtors, because it “needs a strong, capable Pakistan, to continue to function as an effective counterbalance to India.

“It’s important that they’re not seen to let Pakistan down, because if they let Pakistan down in this situation, then the message to everyone else is that they can’t be relied on.”

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