INP
ISLAMABAD
Chinese State Media has suggested that the Chinese leadership should ensure that Pakistan doesn’t face financial crisis, so that the Economic Corridor that is a pilot project of Road and Belt initiative go unhindered.
While Pakistan’s fast growing economy has made it a darling for foreign investment, the surge in the country’s fiscal deficit has become a source of concern for international investors and has led to doubts about its capability to repay its debts.
Given the massive investment that China has made in the country as part of the China-Pakistan Economic Corridor (CPEC), China has a vested interest to ensure that the rising fiscal deficit in Pakistan not snowball into a major financial crisis.
A report of Chinese State media (Global Times) asserted that China should work closely with Pakistan to make sure that the projects it has invested in can generate tangible growth in Pakistan’s real economy, help the country properly manage its deficit level and put it on a sustainable growth path.
There is broad consensus that the deficit ratio should not exceed 5 percent of GDP for developing countries otherwise it could lead to a sharp rise in the debt level and put pressure on the country’s currency to depreciate.
The situation could lead to a vicious cycle where the downward pressure on the currency pushes up inflation, which further drives the currency to depreciate and induces a debt crisis. Pakistan’s deficit issue underlines the government’s weakness in controlling expenditures and generating revenues and should not be overlooked.
As a major creditor and the largest investor in Pakistan, China has an obligation to safeguard its investments in Pakistan and ensure it can recoup its loans.
More importantly, a majority of the projects China financed in Pakistan are part of the $51 billion CPEC, a flagship project of China’s One Belt, One Road initiative, which aligns the political, economic and strategic interests of both China and Pakistan. China cannot afford for these projects to fail financially.
China needs to develop a plan to help Pakistan properly manage its deficit and reduce an excessive build-up of debt.
To do that, China and Pakistan should effectively implement the CPEC project, make it more inclusive and prevent inefficiency and corruption from undermining the project. Pakistan should also seize the opportunity to expand its economic base and boost the real economy in order to achieve long-term debt sustainability.
Meanwhile, China may need to diversify its ways of financing the CPEC projects. Currently, many projects are financed by Chinese government concessional loans.
It is unrealistic and unsustainable to pin all hopes on government loans from China. Such a lending model is likely to drive up the debt level of the recipient country and toss it into a vicious cycle of inflation and currency devaluation. After all, economic and fiscal sustainability cannot be achieved by relying on concessional loans and aid. That requires China and Pakistanto develop a marked-based model to finance these projects and improve loan efficiency.
