China’s ‘Debt Trap’ for Pakistan: Dilutes FATF Ruling – Analysis

By Gen. Shashi Asthana

Under normal circumstances, a one billion dollar loan between two sovereign countries would have gone unnoticed by global community, but what makes China’s one billion dollar lending to Pakistan so special is the timing of this loan and the strategic intention behind it. The economics of this loan to justify the need to buffer Pakistan’s foreign currency reserves, which nosedived to $9.66bn last week from $16.4bn in May 2017, taking China’s lending to Pakistan to over $5bn in this fiscal year, has been well covered by all the segments of media in India and abroad. The messaging and the strategy behind this bailout need deeper analysis.


Timing and Messaging

Pakistan's Begging Bowl.

The timing of the loan, which raises eyebrows, is that it comes immediately after Pakistan being officially included in the grey list of Financial Action Task Force (FATF). FATF is a global body, (of which China is also a member), aims to combat money laundering and terror financing, while taking the decision was convinced that Pakistan has failed to act against terror financing on its soil. China’s tried its best to help its ‘All weather friend’ Pakistan by responses to indicate that they are doing their best to fight terrorism and have made enormous sacrifices towards that. This aid package indicates China’s resolve to signal the global community, that it intends to keep Pakistan economically afloat irrespective of FATF ruling. China is apprehensive that if Pakistan sinks economically (if it does not get IMF aid package which it will bid for after elections), it may well happen that China may not find enough investors for CPEC, and may be its own companies may find it difficult to sustain the project. With this gesture China has tried to raise the confidence level of its investors in CPEC/BRI, despite the risk of criticism of diluting FATF, despite knowing that Pakistan cannot pay the interest of its loan and needs further loan to repay its interests with sinking economy.

Why Pakistan is strategically lucrative to find donor for bail out?

Pakistan’s geographic location is strategically so important that US, as well as China will like to have influence over it. For US, Pakistan is relevant to keep its competitors under check and have bases to launch operations in Afghanistan, especially against al-Qaeda and Haqqani network. As Pakistan provided the bases and manpower to enable US to fight in Afghanistan against Taliban giving shelter to both, it extracted billions of dollars from them as bailout packages, besides military hardware on the excuse to ward of Indian threat to concentrate on fighting on Afghanistan borders to serve US interest. Now US is acting tough on them, post “New South Asia Policy of Trump Administration”, blocking the aid to them, as it is convinced that Pakistan did not do enough to target al-Qaeda and Haqqani network and continues to help them. US is however, in no mood to give a free run to China to cede this strategic space so easily in this region, hence the strategic competition in this region is not yet over.

China needs warm water access for its Western region and smooth flow of energy and trade through this region besides some of the minerals in Pakistan. CPEC and the related infrastructure also give China an opportunity to utilize its overcapacities in Pakistan. This will end up in insurmountable loan for Pakistan, beyond its paying capacity, which may result in Chinese land grab as well as resource grab and some compromise to sovereignty of Pakistan by “Debt/Financial Offensive” by China, which has been very successful in some countries like Myanmar, Maldives, Sri Lanka and others. China also has a strategic interest to keep US out of this region. China therefore has enough strategic reasons to keep Pakistan economically afloat for its own strategic interests, hence it has gladly taken over this role from US.

Pakistan transition to Chinese colony

From global prism and Indian perspective the financial crisis of Pakistan is dangerous. If China continues to be determined to bail it out every time, Pakistan’s status will be reduced to a colony of China, with considerable PLA’s presence in context of protecting CPEC and other investments. Presently Pakistan is a sham democracy with Pakistan Army giving an impression of binding and protecting the country by holding all levers of power. If Pakistan collapses, then, with the number of terrorist groups being nurtured, there is a danger of it coming under Jihadi rule or becoming another Islamic caliphate, which the world community has to deal with, which can be far more dangerous with nuclear assets including tactical nukes present there. With Pakistani Army’s and ISI honeymoon with terrorists, including getting them a backdoor entry into politics through Hafiz Saeed’s Milli Muslim League fighting elections, the radicalization of Pakistani Army is reasonably evident. It is time for the global community including China to revisit their support to Pakistan, and prevent it from being diverted to self destroying Terroristan.