Interest rates

China traps Pakistan in BRI debt trap with high interest rates, rigid repayment terms and lack of transparency

March 24, 2022 11:14 p.m. STI

Islamabad [Pakistan]March 24 (ANI): China traps Pakistan in the Belt of Road Initiative (BRI) debt trap with high interest rates, rigid repayment terms and lack of transparency.
Fabien Baussart, writing in a Times of Israel blog, said China is charging higher interest rates for the Karot hydroelectric project in Pakistan, with the interest rate up to 5.11%. China Three Gorge South Asia Investment Limited holds a 93% stake in Karot Hydropower.
A typical loan from Chinese institutions under the BRI involves an interest rate of 4.2% and a repayment period of less than 10 years. On the other hand, a loan from an international consortium of donors such as the Development Assistance Committee of the Organization for Economic Co-operation and Development, through which countries such as Germany, France or Japan lend, carries an interest rate of 1.1% and a repayment period of 28 years.
Pakistan’s position is the most precarious. Pakistan tops the list of countries receiving BRI aid, with projects worth $27.3 billion, Baussart said.
According to a study by the International Monetary Fund, Pakistan’s external debt soared to $90.12 billion in April 2021, with Islamabad owing China $24.7 billion, more than 27% of Pakistan’s debt burden .
According to the IMF, the burden of hidden and sovereign debts will be a major cause of concern for Pakistan in the coming days. Pakistan’s assets will be tied to the Chinese economy.
There are 26 CPEC related projects in Pakistan. These include eight projects related to energy, four related to transport, one related to communication, three related to education, two related to banking and financial services, one related to reconstruction and rehabilitation, and two projects related to government and civil society, The Times of Israel reported.
To obtain BRI loans, the beneficiary country must sign a memorandum of understanding with China. Most financing for BRI projects is through bilateral agreements between lending banks and recipient governments against sovereign guarantees.

In many cases, the projects are carried out by Chinese companies to which the loans are channeled. The host country gains little, said Baussart.
The first casualty is transparency, as there is usually opacity around sovereign guarantees. The loans are also guaranteed by local resources, the borrower promises the lender a specific asset as collateral for the loan.
Among the countries receiving BRI investments, there are 17 economies with an investment rating of BBB or above, 29 economies are below investment grade and 14 have no rating at all, according to the Economic Outlook and OECD 2018 Financial Reports.
Experts say BRI projects are completed with fewer time overruns, but quality, safety, social equity and the environment are compromised.
The cumulative value of these projects qualified as “in difficulty” since 2005 is estimated at nearly 370 billion dollars. Among these are power projects worth about $5 billion in Pakistan.
The flip side of the BRI coin is that 23 countries receiving BRI financing are facing debt distress. Among the eight countries particularly concerned: Djibouti, the Kyrgyz Republic, Laos, the Maldives, Mongolia, Montenegro, Tajikistan and Pakistan.
Pakistan President Imran Khan, Pakistan Tehreek-e-Insaaf party, when in opposition, had questioned the terms and conditions of CPEC projects and the lack of transparency surrounding them.
However, Pakistan today has no way out but to bow, China’s line is evident in the way Pakistani President Imran Khan, during his visit to Beijing during the Winter Olympics , approved China’s crimes in Xinxiang, Tibet, Taiwan and the South China Sea.
In December 2021, despite an invitation from the United States, Pakistan withdrew, at China’s request, from the Democracy Summit convened by US President Joe Biden. Washington did not invite Beijing to the summit. (ANI)