Debt Situation Analysis
Pakistan’s total debt to China has reached $22 billion. These funds are primarily used for large-scale infrastructure investment projects under the Belt and Road Initiative, including road, power, and port construction. These projects aim to enhance Pakistan’s economic development potential. Pakistan’s economic situation is very severe, with an inflation rate exceeding 30%, a sharp depreciation of the currency, and foreign exchange reserves only around $4 billion. Pakistan needs to repay about $10 billion in foreign debt over the next 12 months, with China being one of its largest creditors, accounting for over 25% of its total foreign debt. In 2023, Pakistan’s total foreign debt reached $115 billion, with nearly 20% owed to China.
Pakistan’s Finance Minister, Muhammad Aurangzeb, stated in recent talks that a mutually beneficial solution must be found. The Gwadar Port, an important part of the China-Pakistan Economic Corridor (CPEC), has a total investment of $1.5 billion. This port is not only a key node of the Belt and Road Initiative but also a crucial hub for Pakistan’s economy. Some people believe that Chinese investment has brought significant economic benefits and job opportunities to Pakistan, with direct investment from China in Pakistan reaching $2.5 billion in 2022, creating over 50,000 jobs. However, others worry that these debts will trap Pakistan in a “debt trap” and result in a loss of economic sovereignty.
China’s investment in Pakistan covers key areas such as energy, transportation, and ports. Any debt default could affect the normal operation of these projects. China’s investment in Pakistan has exceeded $50 billion, covering multiple areas including energy, infrastructure, and transportation. A news report in July 2024 mentioned that Pakistan and China’s finance ministers held a “very constructive” meeting on debt restructuring. Although no significant progress has been made yet, both sides are working hard to find a mutually acceptable solution.
Negotiation Details
Pakistan hopes to alleviate short-term financial pressure by extending the debt repayment period. Pakistan needs to repay about $10 billion in foreign debt over the next 12 months, with China being one of its largest creditors, accounting for over 25% of its total foreign debt. Pakistan’s average borrowing rate from China is around 4.5%, while its borrowing rate from other international financial institutions is about 2.8%. China hopes to ensure the smooth progress of its investment projects in Pakistan, especially key projects involving energy and infrastructure construction. The total investment in the China-Pakistan Economic Corridor (CPEC) exceeds $50 billion, including the Gwadar Port, the Karachi-Lahore Motorway, and several power projects.
To ensure the smooth progress of these projects, China hopes to gain more investment guarantees and operational transparency while restructuring the debt. China proposes that the Pakistani government provide more detailed project progress reports and financial transparency to ensure the effective use of funds. China also hopes that Pakistan can strengthen the security of the projects, ensuring that they are not affected by political and social turmoil during construction and operation. Pakistan’s Prime Minister Imran Khan hopes to release more financial resources for domestic economic development and livelihood improvement through debt restructuring. Pakistan’s GDP growth rate has been below expectations in recent years, with a GDP growth rate of only 2.1% in 2023.
Impact on Regional Stability
As a nuclear country, Pakistan’s economic stability directly affects the security balance in the region. Pakistan’s current total foreign debt exceeds $115 billion, with about 20% (approximately $23 billion) owed to China. The China-Pakistan Economic Corridor (CPEC) is a flagship project of the Belt and Road Initiative, with a total investment exceeding $62 billion, covering energy, transportation, and infrastructure projects. Specific projects include the $8.7 billion Karachi-Lahore Motorway project and the $1.5 billion Gwadar Port expansion project. CPEC is not only an important economic cooperation project between China and Pakistan but also a vital link connecting China with the Middle East, Africa, and Europe. If debt restructuring encounters problems, it could delay or halt CPEC projects, thereby affecting regional economic development.
As an important country in South Asia, Pakistan plays a crucial role in Afghanistan issues, India-Pakistan relations, and anti-terrorism cooperation. Pakistan has received more than $24 billion in international aid over the past decade for anti-terrorism and security stability. From China’s perspective, the success or failure of China-Pakistan debt restructuring will also affect China’s influence in the region and the advancement of the Belt and Road Initiative. China’s total investment in Belt and Road countries has exceeded $1 trillion, and Pakistan is one of the key beneficiaries. If Pakistan’s debt issue is not effectively resolved, it may set an example for other Belt and Road countries, affecting China’s investments and cooperation projects in these countries.
India, as Pakistan’s neighboring country, is highly concerned about Pakistan’s economic situation and the development of the China-Pakistan Economic Corridor. India worries that the construction of the China-Pakistan Economic Corridor may strengthen strategic cooperation between China and Pakistan, posing a challenge to India’s security situation. India has increased its investment in border infrastructure in recent years, with annual investments exceeding $5 billion, to counter the potential threats posed by the China-Pakistan Economic Corridor.