West floats economic coercion theory to stop nations from approaching China for soft loans
Suddenly, as soon as Pakistan received a deposit of $700 million from the China Development Bank to bolster its dangerously depleting foreign exchange reserves, the United States rekindled its shabby “Chinese debt trap” campaign with a renewed eagerness.
While replying to a question on Chinese loans to Sri Lanka and Pakistan at a media briefing last month, US Assistant Secretary for South and Central Asian Affairs Donald Lu expressed deep concerns that “loans may be used for coercive leverage”.
“We are talking to India, talking to countries of the region about how we help countries to make their own decisions and not decisions that might be compelled by any outside partner, including China,” is how Lu further explained the American position on the matter.
In just the last four weeks, this is the third attempt by the Biden administration — following the balloon episode and allegations of Chinese weapons supplies to Moscow — to malign China through its toxic and fake propaganda. This seems to be part of an orchestrated campaign by Joe Biden and his aides to fuel the anti-China hype.
The phrase “Chinese debt trap” is a misnomer that has been coined to scare developing countries from approaching China for soft developmental loans — which the US and the West are unwilling to provide for the uplifting of the infrastructure in these countries. The American narrative is that Beijing is providing high-interest loans to those countries with an objective of using the debt burden as a coercive tool later for geopolitical ends and to influence the policies of those countries.
Nothing is further from the truth than this concocted propaganda. Let us take the example of Pakistan, where the existing economic crisis has nothing to do with the Chinese loans. In fact, China has been generously supporting Pakistan in this acute crisis.
Pakistan is struggling with inflationary pressure, a shortage of basic goods and post-pandemic economic recovery imbalances amid an extremely fragile exchange rate.
To tackle this crisis, Pakistan is hoping to secure IMF support plus short-term refinancing and rollovers from friendly countries, particularly China and the Gulf States. However, these traditional benefactors have come to diagnosis that this short-term band-aid approach is ineffectual and are now more strongly resolved than in previous crises to perform a rescue with a purpose. Pakistan’s fiscal woes continue to mount, as the foreign debt has reached a staggering $100 billion, with nearly one-third ($30 billion) owed to China — the country’s largest creditor.
But this Chinese debt has no direct or indirect linkage with the existing economic turmoil in the country. Years of domestic economic mismanagement, political instability and corruption have primarily contributed to Pakistan’s ongoing crisis.
In addition, Pakistan has faced severe hardships in the past year — including devastating floods that resulted in an estimated $30 billion in damages and lost productivity. Further exacerbating the situation, the war in Ukraine has caused food and fuel prices to skyrocket.
The nation’s foreign reserves have plummeted to just over $3.25bn in the week ending Feb 17, barely enough to cover three weeks’ worth of imports. Inflation for essential commodities such as cooking oil, vegetables, and fuel has surged to a whopping 38.4 percent. Pakistan faces a substantial external debt servicing obligation of $23 billion for the ongoing fiscal year. While $6 billion has already been repaid and $4 billion rolled over, a hefty $13 billion remains unfunded.
Additionally, the country is also obligated to repay the significant amount of $75 billion during the fiscal years 2024-26. This mounting debt puts immense pressure on Pakistan’s already struggling economy, requiring the government to devise a comprehensive plan to address these liabilities.
While the China-Pakistan Economic Corridor (CPEC) is the BRI’s flagship project, Beijing has a huge stake in the political and economic stability of the country. Chinese participation in CPEC projects are beneficiaries of financing from
Chinese policy banks, notably the China Development Bank (CDB) and the Export-Import Bank of China (CHEXIM).
In fewer than ten years, China has emerged as Pakistan’s largest creditor and the principal source of foreign direct investment. This rapid shift in economic dynamics highlights the strengthening ties between the two nations and the critical role that China plays in supporting Pakistan’s financial growth.
Similarly, China’s economic footprint in Pakistan has greatly expanded since the inception of the CPEC. As China’s economic involvement in Pakistan has amplified, so has its stake in its economic and political stability.
Political instability and a resurgence of violence have compounded Pakistan’s woes, although the World Bank has attributed the stunting of economic progress primarily to distortions introduced or unaddressed by policy decisions. Last year, the Pakistani rupee plunged nearly 30 percent compared to the US dollar, becoming one of the worst performing currencies in Asia.
It is no secret that China is the biggest lender to other countries and a major creditor to low- and middle-income nations. However, what is less recognized is that China’s own exposure to financially troubled borrowers has grown considerably. As a result, China has transformed itself from being a loan provider to a debt collector and becoming a significant player in sovereign debt renegotiations. This situation has also caused China to change its strategy by providing balance of payments support to partners like Pakistan, instead of project lending to repay project debts.
Until now, China has dealt with debt distress by rescheduling loans rather than writing them off, offering emergency loans without requiring borrowers to implement economic policy reforms, and taking an independent approach rather than coordinating with other creditors and the IMF.
However, there are indications that this approach could change. Chinese officials apparently urged Islamabad to mend its relationship with the IMF, suggesting that Beijing views the resumption of the IMF’s lending program as crucial in reducing Pakistan’s risk of default.
Despite such a transparent and rationale approach by China, the US and its allies are busy in loudly chanting the mantra of “China debt trap”, which is reflective of their myopic approach toward China.
The author is an international affairs commentator and freelancer based in Karachi, Pakistan.
The views do not necessarily represent those of China Daily.