As newly elected government in Pakistan headed by Prime Minister Imran Khan is willing to pursue an International Monetary Fund (IMF) bailout, a group of United States Senators have asserted that Islamabad is at risk of debt distress due to rising current-account deficit and external debt obligations caused by the China Pakistan Economic Corridor (CPEC). David A Perdue, Patrick Leahy and 14 other U.S. senators have written to Secretary of State Michael R. Pompeo and Secretary of Treasury Steven T. Mnuchin while expressing concern over bailout request by countries that fall in China’s debt trap.
“These financial crisis illustrates the dangers of China’s debt-trap diplomacy and its Belt and Road Initiative (BRI) to developing countries, as well as the national security threat they pose to the United States,” said the senators in their letter. The Centre for Global Development has estimated that of the 68 countries currently hosting BRI-funded projects, 23 countries are at risk of debt distress, and in eight of those countries, future BRI-related financing raises serious concerns about sovereign debt sustainability.
“It is also found that Chinese behavior as a creditor has not been subject to the disciplines and standards that other major sovereigns and other multilateral creditors have adopted collectively, and in the process, debt levels and dependence on China are rising,” said the senator by citing an example of Sri Lanka, which was promised a bailout of $1.5 billion by IMF in 2016.
As financially strapped countries negotiate with China to free themselves of mounting debt, Beijing has extracted onerous concessions, including equity in strategically important assets. Further, Beijing has reportedly used economic pressure to affect foreign policy decisions. The senators wrote, “In Djibouti, for instance, China has provided more than $1.4 billion in infrastructure funding, equivalent to 75 percent of Djibouti’s GDP. Most of that capital comes in the form of loans from the Export-Import Bank of China.
The most recent IMF assessment stresses the extremely risky nature of Djibouti’s borrowing program, noting that in just two years, public external debt has increased from 50 to 85 percent of GDP, the highest of any low-income country.” “As Djibouti increases its dependence on China, there are fears that China will gain control of the Doraleh Container Terminal, further consolidating China’s influence in the critically strategic region,” the letter added. Last year, the Sri Lankan government, after being unable to repay over $1 billion of Chinese debt for construction of the Hambantota Port, granted a Chinese state company, a 99-year lease on the facility.
There are concerns that given Pakistan’s growing Chinese debt, the same could happen at Gwadar Port in Pakistan. The U.S. senators, who have also addressed their letter to Defense Secretary James N. Mattis wrote, “In China’s String of Pearls strategy for the Indo-Pacific, Gwadar and Hambantota are important footholds that if converted into naval bases will enable the PLA Navy to maintain a permanent presence in the Indian Ocean.”