Pakistan’s growing reliance on China amid its economic crisis raises concerns over the long-term implications of its rising debt burden.
The $2 Billion SAFE Loan
As Pakistan grapples with a severe economic crisis. So, the country has once again turned to its close ally China for a critical financial lifeline. Pakistan has secured a $2 billion loan from China’s State Administration of Foreign Exchange (SAFE) to help shore up its dwindling foreign exchange reserves and ease the pressure of its mounting external debt obligations.
The terms of this loan are noteworthy – it carries a 1-year maturity with a 1-year grace period and an estimated all-in interest rate of just 1.28%. Though, this is not the first time Pakistan has sought such assistance from China. In fact, the $2 billion SAFE loan is part of a total of $4 billion in loans Pakistan has secured from its northern neighbour to stabilize its foreign exchange reserves.
Pakistan’s Deepening Debt to China
The reliance on China is not new for Pakistan. As of 2022, Pakistan owed China around $26.5 billion, which accounts for over 72% of the country’s total bilateral external debt. This debt has rapidly escalated from just $7.6 billion in 2016, underscoring the growing financial dependence on China.
China’s high level of debt is a significant concern. They estimated Pakistan’s interest payments on its total external debt to consume around 57% of the government’s revenue in 2023. With such a substantial portion of government resources dedicated to servicing debt. Pakistan’s ability to invest in critical infrastructure, social welfare, and economic development is severely constrained.
Navigating the Path to Economic Stability
The country’s economic crisis and high debt levels have also raised the risk of default. Also, it prompts Pakistan to seek further assistance from the International Monetary Fund (IMF) and other creditors. This precarious situation highlights the urgent need for Pakistan to implement long-overdue structural reforms to address its underlying economic challenges and reduce its reliance on external borrowing.
As Pakistan continues to navigate this economic storm, its reliance on China’s financial support remains a tenuous lifeline. In conclusion, the immediate relief provided by the SAFE loan is crucial. When the long-term implications of Pakistan’s growing debt to China are worrying. Striking a delicate balance between securing critical funding and managing its debt burden will be a defining challenge for Pakistan’s policymakers in the months and years ahead.
