China and Pakistan tripping over CPEC gives India reason to smile

By Abhishek BannerjiFirst Published 17, Aug 2018, 5:15 PM IST
Highlights

One of the things that Pakistan is choking on is a pile of Chinese debt, much of it related to the $60 billion China Pakistan Economic Corridor

Pakistan's economy is in a tailspin. That in itself is nothing new. In fact, Pakistan has accepted as many as 12 bailouts from the International Monetary Fund (IMF) since Muhammad Zia-ul-Haq began the tradition in 1982. Every few years, Pakistan's economy inexorably finds itself in a soup. Yet, somehow or the other, the world always comes together and agrees to pull the country back from the brink. Even if they are caught giving shelter to Osama bin Laden.

But this time may well be different. Because the impact of Pakistan's current economic crisis extends far beyond their borders and poses a serious threat to China's global ambitions. 

On the face of it, things should be going well for Pakistan. At 5.79%, the GDP growth is at its highest point in 13 years. Yet, Pakistan is drowning in debt and direly needs an infusion of at least $12 billion simply to stay afloat. 

There are multiple reasons for this mess: rampant corruption has led to an extremely small taxpayer base, a yawning deficit and few exports. But one of the things that Pakistan is choking on is a pile of Chinese debt, much of it related to the $60 billion China Pakistan Economic Corridor (CPEC). 

Under these circumstances, an IMF bailout for Pakistan would effectively mean a bailout for Chinese banks that have lent unreasonable amounts of money to Pakistan. No wonder then that Mike Pompeo, secretary of state in the Donald Trump administration, has made it clear that the US would not support IMF money being utilised to pay off Chinese lenders. Considering that the US has by far the highest voting rights at the IMF, this becomes a severe headache for Pakistan. 

Realistically speaking, Pakistan has only two real options on the table when it comes to a bailout. The first is the IMF, where America's hostile stance makes things difficult. Even if they were to succeed in obtaining an IMF bailout, it would come with disclosure requirements regarding Chinese debt that the Pakistani government is loathe to put out in public domain. 

The second option is for Pakistan to seek a bailout from China itself. In effect, the Chinese government would then be bailing out its own banks. It is believed that China has already lent as much as $5 billion in the current fiscal in order to keep up Pakistan's forex reserves. 

Whichever option Pakistan chooses and whether or not China chooses to bail out its own banks via Pakistan, it is clear that the CPEC dream and with it, China's Belt Road Initiative is rapidly going sour. 

For this, one must understand how the Belt Road Initiative is supposed to work. Chinese banks lend huge amounts of money to developing countries to fund infrastructure projects. Generally speaking, the contracts for these projects then go to Chinese companies. Not only do the infrastructure projects create trade corridors for efficient movement of Chinese exports to these countries, China also gets preferred access to their markets. 

The promise for developing countries is that infrastructure projects will kickstart their economies and create jobs which will enable them to grow their way out of the debt. But the bottomline is that the countries are stuck with having to pay the debts one way or another. 

For all intents and purposes, this is colonialism under a new name. China's obvious aim is to create a massive trade empire that will firmly establish them at the top of the world order. 

This only works until the developing countries are reasonably hopeful that they will ultimately be better off, that Chinese debt will not leave them in ruins, nor squish their sovereignty. In that case, if Pakistan were to go belly up, it would send a wave of panic among all countries that have signed up to be part of the 'One Belt One Road' project. 

Only last year, Sri Lanka had to hand over the strategic Hambantota port to the Chinese. The reason? A $6 billion loan from China that Sri Lanka could no longer pay back. All Sri Lanka got in return was an 'assurance' that the Chinese would not use the port for military purposes. Who knows if that assurance is worth anything at all? This is terrible publicity for the Chinese Belt Road Initiative. 

On the other hand, if China were to bail out Pakistan, it would amount to an utter waste of their own money. Since the Belt Road Initiative is more about China's diplomatic ambitions, Chinese banks have often lent out money to developing countries without any underlying economic rationale. If China decides to swallow the losses in Pakistan, soon enough it will find itself facing similar demands elsewhere. And the Pakistanis themselves will probably be back asking for more in three years or less.

How much money can China afford to lose? The Chinese started with an initial budget of $500 billion for the Belt Road Initiative. When you start by telling the world that you have half a trillion dollars to spend, the money tends to start disappearing. All across the world, government money has a way of disappearing at amazing speed. 

Because governments invariably tend to throw good money after bad. Which is what China would be doing if it decides to bail out Pakistan at this stage. Especially in this case where the project is backed by the giant imperial ego of Xi Jinping. The ego prevents the Chinese from realising when to cut their losses. 

Indeed, world conquest never worked out for anybody. It is said that Muhammad bin Tughlaq had a plan to conquer the 'world'. It did not work out for Muhammad bin Tughlaq 700 years ago just as it did not work out for Alexander 2,000 years before him. It won't work out for Xi Jinping either. 

To summarise, the Chinese have two options. The first is to let Pakistan default and scare away every other country that has signed up for the Belt Road project. The second is to keep throwing good money after bad, not just in Pakistan but everywhere around the world. Until they have lost their budgeted $500 billion and likely much more. For India, the schadenfreude is ours to enjoy. 

Last Updated 9, Sep 2018, 9:58 AM IST