Pakistan: What Does a Loan From China Mean for the Already Indebted Country?

As Imran Khan prepares to take over as prime minister, his administration's first challenge will be to address Pakistan's depleting foreign exchange reserves. While Khan could turn to the International Monetary Fund for a loan, China — Pakistan's strongest partner on the world stage — is another option. But a bailout from Beijing will add to Pakistan's heavy debt to China, offering a test case for whether Islamabad will eventually have to sign over strategic assets to pay down its obligations. 

What Happened

China has reportedly agreed to give Islamabad a loan to shore up Pakistan's plummeting foreign exchange reserves as its import bill grows. Although the two countries have yet to sign a deal, the prospective loan — reportedly on the order of at least $10 billion — would enable Pakistani Prime Minister-elect Imran Khan's incoming administration to avoid turning to the International Monetary Fund (IMF) for help, as Pakistan has done 12 times in its history. The IMF attaches conditions to its loans, and austerity measures such as spending cuts, tax hikes and structural reforms would undermine Khan's ability to fund his populist vision for Pakistan: to turn the country into a social welfare state aimed at improving the lives of the poor.

Some Background

China has already lent Pakistan $5 billion in a mix of bilateral and commercial loans during the latest fiscal year, which ended June 30. But rising oil prices continue to drive up Pakistan's import bill, and remittances and exports aren't growing quickly enough to keep up. The result is a growing current account deficit; in July, it reached $18 billion, double the goal amount Islamabad had set.

From Beijing's standpoint, bailing Pakistan out is necessary to ensure the country's stability, given its strategic significance. Pakistan is China's strongest partner in South Asia, while China is Pakistan's strongest global partner. Their relationship, forged in the 1960s, is rooted in a shared desire to counterbalance India, which Pakistan views as an existential adversary and Beijing considers a rival (if less powerful) Asian military power.

In 2013, Pakistan and China's relationship assumed a more robust economic dimension when the two countries launched the China-Pakistan Economic Corridor, a network of roads, power plants, ports and special economic zones now worth $62 billion in total. The project, meant to spur development in western China's landlocked Xinjiang province by linking it to the Arabian Sea through the port of Gwadar, is part of Beijing's broader strategy to lessen its reliance on the Strait of Malacca. The economic corridor itself is a branch of Beijing's Belt and Road Initiative, which spans the entire Eurasian landmass.

Why China's Loan to India Matters

If the loan goes through, it will prompt questions about China's role as an alternative lender to U.S.-backed institutions like the IMF. And though Chinese foreign exchange loans to Pakistan have lacked conditions in the past, critics in the country nevertheless point to China's majority stake in Sri Lanka's Hambantota port as a cautionary tale of what Beijing could expect from Islamabad if it, too, fails to service its growing debt. Such a large bailout, at a time when Pakistan may struggle to make payments, probably will come with some strings attached, but it is not yet clear what sorts of commitments China might expect in return.