Foreign Affairs

The Folly of Pakistan’s China Gamble

Why Relying on Beijing Is a Bad Bet

BY HUSAIN HAQQANI AND JAVID AHMAD

August 2, 2022

HUSAIN HAQQANI is Director for South and Central Asia at the Hudson Institute. He was Pakistan’s Ambassador to the United States from 2008 to 2011.

JAVID AHMAD is Senior Fellow at the Atlantic Council and a Nonresident Scholar at the Middle East Institute. He was Afghanistan’s Ambassador to the United Arab Emirates from 2020 to 2021.

Extracts: for full text see –

https://www.foreignaffairs.com/china/folly-pakistans-china-gamble

In July, a popular uprising in Sri Lanka toppled the government and sent its president scurrying into exile. The revolt had been brewing for months in the wake of the country’s economic implosion, but it still caught observers off-guard. In surreal scenes, protesters took over the presidential palace, swam in the pool, dined in the kitchen, traipsed around the bedrooms, and held stylized meetings in the conference rooms.

Such images from Sri Lanka stunned cash-strapped economies across South Asia, a turbulent region plagued by unstable governments, toxic nationalism, violent extremism, and the unsettling consequences of China’s expanding influence. From Dhaka to Islamabad, governments in the region have looked at the chaos in Colombo and wondered if they might be next.

Sri Lanka’s dire situation stemmed from the collapse of its economy in the midst of spiking commodity prices and a staggering debt crisis. It offers a bitter lesson to other floundering economies in similar situations, especially those that, like Sri Lanka, rely excessively on China. Including Sri Lanka, 42 middle- and low-income countries, such as Djibouti, Kyrgyzstan, Laos, and Zambia, have reportedly taken on significant debt obligations to China worth over ten percent of GDP. The debacle in Sri Lanka is particularly chastening for Pakistan, a country that is heavily dependent on Chinese loans.…

A POWDER KEG

Thanks to the country’s size, the stakes are even bigger in Pakistan than they were in Sri Lanka. Pakistan is home to the world’s fifth-largest population and a $340 billion economy. In the last six years, economic productivity has fallen to record lows, domestic revenues and foreign reserves have shrunk, the currency has depreciated, unemployment is soaring, and political corruption has increased. The country’s total foreign debt has nearly doubled since 2016, reaching a monumental $131 billion. Alarm bells are ringing even as Pakistan’s bickering leaders refuse to listen.

Scrambling to avoid a default, Pakistan has now been on a borrowing spree to fund its expenditures and meet its debt repayments. In June, Pakistan’s shaky new government borrowed another $2.3 billion from China to shore up its foreign reserves….

The government has tried to get Pakistanis to accept the reality of straitened times, urging them to cut back on drinking tea to help reduce the country’s outstanding $600 million bill for tea imports….

…A growing cadre of Pakistani leaders, subscribing to a brand of Islamic nationalism, has made Islamist militant groups increasingly mainstream; others are fanning dangerous anti-American sentiments to win public support. A powder keg of grievance may explode as ordinary Pakistanis become poorer and angrier.

CHINA’S ISRAEL

…Islamabad owes nearly a quarter of its foreign debt to Beijing. But no Pakistani leader has dared to question the country’s unequal relationship with its neighbor to the north, silencing any criticism of China. Pakistan is quick to upbraid its neighbor India for attacks against and the marginalization of India’s minority Muslim population, but it has refused to condemn China’s gross mistreatment of the Muslim Uyghur population.

According to reports, a Chinese official once described Pakistan to a U.S. counterpart as “China’s Israel,” a measure of the strength of the alliance. The main pillar of the economic relationship between the two countries is a $62 billion Chinese investment pledge—nearly one-fifth of Pakistan’s GDP—in the China-Pakistan Economic Corridor, a project that is the largest single-country program in Beijing’s sprawling infrastructure investment program known as the Belt and Road Initiative.

Launched in 2015, the economic corridor involves developing a large-scale infrastructure network in Pakistan, including a major seaport, a $7.2 billion railway project, a $2 billion metro system in Lahore, hydroelectric power plants, hundreds of miles of fiber-optic connectivity between the two countries (built and managed by Chinese telecommunications giant Huawei) and multiple special economic zones. China’s commitment exceeds the cumulative total of foreign direct investment and foreign assistance to Pakistan from other sources, including from the United States.

….Because most of these projects require machinery from China, Pakistan’s imports bill has only grown larger. Meanwhile, Chinese projects have done little to boost indigenous employment inside Pakistan because many Chinese companies prefer bringing in their own labor and housing these workers in newly built residential colonies where they seldom interact with the local population. In some cases, Chinese investment projects have resulted in land grabs, threatened the livelihood of Pakistani fishermen, and displaced scores of local people, creating wider instability.

Slowly, Pakistanis are waking up to the trouble of getting so entangled with Beijing’s overseas investment machine. The initial euphoria that greeted Chinese investment is dissipating. Pakistani leaders are beginning to look warily at the scale of the country’s debt obligations…

In the energy sector, the Pakistani government has struggled to pay Chinese power producers an overdue bill of more than $1.5 billion. Pakistan has instead sought more Chinese loans to meet these costs.…

A PORT TO NOWHERE?

The travails of Gwadar port are emblematic of the troubles looming for Pakistan. The Chinese have placed special focus on building Gwadar, a seaport on the Arabian Sea coast in Balochistan province, promising to expand access to the Middle East. Leased for 40 years to the Chinese government in 2017, Gwadar is operated by China Overseas Ports Holding Company–Pakistan, a Chinese state-owned firm that receives 91 percent of the profits generated from activities at the port.

Yet, since the Chinese company took control, the port has made negligible progress in developing its commercial business. Chinese ships evidently frequent the port but carry much less than the originally promised 13 million tons of cargo annually. Basic issues like water supply and power shortages remain unaddressed.…

…Pakistan’s overreliance on China perpetuates a vicious cycle typical of other countries drawn to China’s development model. The enormous debt owed to China, combined with negligible economic diversification in these countries, makes it increasingly likely they can turn only to China for any future bailout.

BROTHERS IN ARMS

Beyond these economic questions, concerns abound in India and the West about Chinese intentions to establish a naval base in Gwadar, which may become a dual-use port operated by China as both a commercial and military facility. Such a port would bolster Chinese maritime strength in the Indian Ocean, complementing its strong naval presence in Djibouti. Pakistan maintains a naval presence in Gwadar, but it has also stationed over 15,000 military personnel in the area to provide security to Chinese nationals.

Threats to Chinese nationals and projects have grown in spite of Pakistani security assurances. Baloch nationalists and other militant groups have targeted Chinese nationals….

… China has continued to be Pakistan’s largest arms supplier. Between 2010 and 2019, China supplied 70 percent of Pakistan’s arms imports, worth over $5 billion. Between 2017 and 2021, a staggering 47 percent of China’s total global arms exports went to Pakistan.

…The Chinese appear to be helping Pakistan prepare for a possible conventional war with India, delivering, in violation of arms control agreements such as the Missile Technology Control Regime, a wide range of combat aircraft, armed drones, ballistic missile systems, air defense systems, submarines, warships, transport and reconnaissance helicopters, tanks, and guided munitions. The two armies have also conducted joint military exercises in recent years. For its part, India has protested the China-Pakistan Economic Corridor because it passes through the disputed Kashmir region….

LEARN FROM YOUR MISTAKES

Despite misgivings, bilateral cooperation continues to increase. In April, Gen. Qamar Javed Bajwa, Pakistan’s army chief, publicly declared that his country’s engagement with China is “growing” and rebuked the West for refusing to invest in Pakistan’s military and infrastructure plans. The military has increased its spending this year by over 11 percent despite the country’s financial woes. In the meantime, with rising attacks on Chinese nationals, China has begun deploying private security companies to safeguard its interests.

Pakistan is gambling on the fact that it is far more important to China, and the rest of the world, than Sri Lanka. The global repercussions of political chaos in Pakistan, following a similar economic collapse, would be greater than that of Sri Lanka, increasing Pakistani hopes that major powers would step in to keep the country afloat.…

Pakistan’s leaders are acting in a shortsighted manner similar to that displayed by Sri Lanka’s politicians. Their incessant squabbling for power, coupled with an overbearing military that refuses to change the country’s decades-old foreign policy paradigms, has left Pakistan dependent on China. Pakistan’s support for some jihadist groups and the Afghan Taliban has alienated Western governments, leading them to engage far less with a country that was once a close U.S. ally.

Instead of offering benign neglect, the United States and its partners would do well to prepare for contingencies that might arise from Pakistan’s potential political and economic disarray. This preparation would include taking at least minimal steps to protect Pakistan from the fallout of economic collapse, which would include increased migration and the radicalization of Pakistan’s populace.

To avoid this fate, Pakistan’s leaders must reach consensus on long-delayed reforms such as reducing government expenditure and ending Pakistan’s association with jihadi terrorism, which is necessary to attract foreign investment. Opening trade with India—a controversial but potentially transformative move—would also relieve pressure on Pakistan’s external payment obligations. Above all, Pakistan must learn to live within its means rather than pursuing regional preeminence through dependence on China. The United States has so far resisted the temptation to out-invest China in Pakistan. That restraint, combined with a thorough reappraisal of U.S. policy towards Pakistan, may be a better strategy for the United States and Pakistan in the long run, forcing Pakistan’s leaders into much-needed reappraisal of their own mistakes.