Most Loans on CPEC at Commercial Rates; Report

September 30, 2021

According to a report releasedby AidData, a US-based international development research lab, a significant portion of Chinese development financing under the China-Pakistan Economic Corridor (CPEC) consists of loans at or near commercial rates rather than grants.

According to the report, Chinese loans under CPEC account for 95.2 percent of total commitments in the energy and transportation sectors, respectively, and 73 percent of total commitments in the energy and transportation sectors.

Between 2000 and 2017, China invested $34.4 billion in Pakistan’s development. With 71 projects worth $27.3 billion currently in the works, Islamabad is the seventh largest recipient of Chinese overseas development financing. According to the report, the average interest rate for a loan with a maturity of 13.2 years (when full repayment with interest is due) and a grace period of 4.3 years is 3.76 percent.Furthermore, according to the report, Pakistan received roughly half of all Chinese development finance in the form of “export buyer’s credit,” or money lent to Pakistan by Chinese institutions to facilitate the purchase of equipment and goods by Chinese implementation partners.

State-owned companies, state-owned banks, special purpose vehicles, joint ventures, and private sector institutions now account for up to 40% of China’s lending to Pakistan. According to the report, these Chinese loans do not appear on the government’s booksfor the most part.However, they frequently benefit from an explicit or implicit form of government liability protection, which blurs the distinction between private and public debt,” it said, adding that in some cases the government has issued sovereign guarantees. This means that if non-government borrowers are unable to meet their financial obligations, the national exchequer will repay the loans.

In other cases, the government has offered borrowers a “guaranteed return on equity.” This type of guarantee effectively amounts to a form of hidden debt owed to China… The government likes these financial arrangements because they don’t have to be disclosed as public debts, according to the report, which also notes that the economy is already in the “danger zone” with a public debt-to-GDP ratio of 92.8 percent.In response to claims that Chinese investments are a hidden debt for the government, Khalid Mansoor, the Special Assistant to the Prime Minister (SAPM) on CPEC Affairs, said all CPEC projects are fully transparent and involve no hidden loans.

“All of the projects have been approved by Nepra (National Electric Power Regulatory Authority).” Everything is on display. The websites of Nepra and the NHA (National Highway Authority) display capital costs for all projects, including Chinese financing. He stated that there is no hidden debt.

According to the report, China now outspends the US in Pakistan by 8.4 times, compared to only 0.68 times in 2002. While Chinese funding has primarily gone to hard infrastructure sectors such as energy and transportation, US assistance has primarily gone to civil society, social infrastructure, education, and other areas during the same time period. Even at the height of Pakistan’s crippling energy crisis in the mid-2010s, only about 10% of US development aid to Pakistan went to the energy sector.

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