China must ensure that the rising fiscal deficit in Pakistan does not "snowball" into a major financial crisis as it has invested heavily in the country, specially in the USD 46 billion CPEC project, official Chinese media said today.
China must ensure that the rising fiscal deficit in Pakistan does not “snowball” into a major financial crisis as it has invested heavily in the country, specially in the USD 46 billion CPEC project, official Chinese media said today.
“While Pakistan’s fast growing economy has made it a darling for foreign investment, the surge in the country’s fiscal deficit and public debts has increasingly become a source of concern for international investors and has led to doubts about its capability to repay its debts,” an article in the state-run Global Times said.
The investments under the CPEC alone amounted to USD 51 billion, the article said.
“Given the massive investment that China has made in the country as part of the China-Pakistan Economic Corridor (CPEC), China has a vested interest to ensure that the rising fiscal deficit in Pakistan not snowball into a major financial crisis,” it said.
“China should work closely with Pakistan to make sure that the projects it has invested in can generate tangible growth in Pakistan’s real economy, help the country properly manage its deficit level and put it on a sustainable growth path,” it said.
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Write-ups critical of Pakistan are rare in Chinese media, considering the all weather close relationship between the two.
Citing Mongolia’s experience where the fiscal deficit climbed to around 15 per cent of GDP in 2016, making it hard for to repay foreign debts, the article said “the worst-case scenario is the last thing China would desire in Pakistan”.
Citing Pakistan media reports it said Pakistan’s fiscal deficit surged to around 2.4 per cent of GDP during the first half (July-December) of the fiscal year 2016-17, the highest in four years.
In 2014-15, the half-year deficit stood at 2.2 per cent and full-year deficit at 5.3 per cent.
The government hopes to keep the deficit below 3.8 per cent of the GDP during the full 2016-17 year.
“A surge in the country’s deficit would make it vulnerable to external shocks and would increase Pakistan’s chances of a debt default. As a major creditor and the largest investor in Pakistan, China has an obligation to safeguard its investments in Pakistan and ensure it can recoup its loans,” it said.
“China needs to develop a plan to help Pakistan properly manage its deficit and reduce an excessive build-up of debt. To do that, China and Pakistan should effectively implement the CPEC project, make it more inclusive and prevent inefficiency and corruption from undermining the project,” the Global Times report said
“Meanwhile, China may need to diversify its ways of financing the CPEC projects. Currently, many projects are financed by Chinese government concessional loans. It is unrealistic and unsustainable to pin all hopes on government loans from China. Such a lending model is likely to drive up the debt level of the recipient country and toss it into a vicious cycle of inflation and currency devaluation,” it said.
“More importantly, a majority of the projects China financed in Pakistan are part of the USD 51 billion CPEC, a flagship project of China’s One Belt, One Road initiative, which aligns the political, economic and strategic interests of both China and Pakistan. China cannot afford for these projects to fail financially,” it said.