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Pakistan’s new government just took an important first step to reducing its debt obligation to China

Pakistan’s new government just took an important first step to reducing its debt obligation to China
Business2 min read

  • When Imran Khan was elected the Prime Minister of Pakistan in August, one of the major concerns he outlined was the country’s looming public debt crisis.
  • The new government of Pakistan has sought to curtail its debt obligation to China by preemptively reviewing all CPEC projects and renegotiating some of them.
  • Earlier this week, the country’s Railways Minister, Sheikh Rasheed, said that the government was curbing Chinese investment in its railways network from $8.2 billion to $6.2 billion.
When Imran Khan was elected the Prime Minister of Pakistan in August, one of the major concerns he outlined was the country’s looming public debt crisis. In fact, the reduction of debt and imposition of fiscal austerity were key components of his “New Vision” for Pakistan.

The China-Pakistan Economic Corridor (CPEC), which is part of the Belt and Road Initiative, is cited a major reason for Pakistan’ mounting debt obligations. Around $60 billion of infrastructure projects have been initiated by the Chinese government under the project, and Pakistan will be left to foot the bill for a majority of them.

Hence, the new government of Pakistan has sought to curtail its debt obligation to China by preemptively reviewing all CPEC projects and renegotiating some of them. Earlier this week, the country’s Railways Minister, Sheikh Rasheed, said that the government was curbing Chinese investment in its railways network from $8.2 billion to $6.2 billion.

The original loan of $8.2 billion was meant for the development of Main Line-1, a 1,872 km track from Karachi to Peshawar that functions as the backbone of the country’s rail system. The project was expected to increase the number of trains running on the track everyday from 32 to 171. However, with the reduced funding, this number will be significantly lower.

While this is the first concrete step by the new government to address concerns of a Chinese debt trap, this isn’t the first time the country has pushed back on investments under the CPEC. In November 2017, Pakistan decided to exclude the Diamer-Bhasha Dam, a $14 billion project, from the CPEC ambit after concluding that China’s financing conditions weren’t favourable. At the time, the government said it would fund the project itself.

The primary model for Chinese financing is a upfront investment which functions as a long-term loan payable by Pakistan. While the Pakistani government has suggested that China adopt a build-and-operate model, whereby it can earn back its investment through cash flows from the project, China is said to be against the idea as it doesn’t feel that most of the projects will be able to generate an acceptable level of profit.

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