Pakistan taps Chinese credit for railway upgrade despite debt crisis

Since the 19th century, Pakistan’s prosperous railways have been transporting passengers and goods from the Arabian Sea to the Himalayas. But the colonial-era network is in a state of disrepair, with dilapidated trains and some roads left unusable by last year’s devastating floods.

Together with its close ally China, Pakistan is now preparing at least one solution: a $10 billion renovation of the 1,700-kilometer-long Mainline 1 railway, which will be paid for with loans from Beijing.

Prime Minister Shehbaz Sharif and President Xi Jinping agreed in November to begin work on a port line connecting Karachi with Lahore and the capital Islamabad. The project is expected to increase the maximum train speed on the route to 160 km/h.

But the ML1 upgrade has raised questions about whether heavily indebted Pakistan should borrow billions of dollars for expensive infrastructure at a time of severe financial problems.

Some analysts believe that Pakistan, which has about $100 billion in foreign debt from lenders including the World Bank and China, is at risk after dwindling its foreign exchange reserves.

Ahsan Iqbal, Pakistan’s planning minister, said the ML1 upgrade was essential to keep trains running and was an example of transformational work made possible by China’s loan.

“If we don’t implement this project, in a few years Pakistan will lose its rail logistics,” Iqbal told the Financial Times.

“The entire railway system will be destroyed, this main line will be destroyed. Doing business this way would be very risky. This is no longer an option. It’s a must.”

Pakistan railway network map

But critics said taking on more debt for the ML1 project was an example of the bad debt decisions that have led Pakistan to successive economic crises in recent years. Pakistan’s foreign reserves have dwindled to $6 billion, or the equivalent of less than a month’s worth of imports.

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Zubair Khan, Pakistan’s former commerce minister and IMF official, said the government was “deceiving the country” by suggesting Pakistan was closer to running out of resources than officials were admitting. “Truths hide.”

Iqbal, who oversees Pakistan’s involvement in the Belt and Road Initiative, China’s international infrastructure plan, said it will take six to nine years to complete the ML1 upgrade. The work will include replacing the road, upgrading the signalling, converting the crossings to underpasses or overpasses and erecting fences to stop cattle crossing the line.

The planning minister said the project would proceed in phases “to make it more manageable” at an initial cost of $3 billion. The loan from China will be repaid over 20 to 25 years and will be “preferential,” he said, without elaborating.

The column graph of net reserves with SBP (month-end level, billion dollars) shows that the foreign reserves of the Central Bank of Pakistan have decreased

Chinese loans to Pakistan go back years, as part of efforts to strengthen economic and military ties that will help counter their arch-rival India. The ML1 upgrade is part of the China-Pakistan Economic Corridor, which is the centerpiece of the BRI, with an estimated total cost of $60 billion.

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CPEC also includes the development of a deep sea port at Gwadar in southwest Pakistan, among other projects by China. Beijing will provide Pakistan military with 8 submarines and advanced J-10C aircraft.

A Western diplomat in Islamabad said the push for such projects to continue even as Beijing saw growing financial problems in BRI host countries underscores the importance of its relationship with Pakistan.

“Even if others [of BRI] is lagging behind, China wants to stay in Pakistan’s way,” the diplomat said, adding that the relationship “has developed important military aspects over the long term”.

Chinese projects and funding have also contributed to the country’s internal tensions. Last month, police imposed emergency measures in Gwadar and broke up a protest camp that had blocked operations at the port, demanding that Chinese nationals leave.

People gather on the platform of Lahore railway station
ML1 upgrade will add to Pakistan’s foreign debt © Mohsin Raza/Reuters

Projects like ML1 have also fueled analysts’ concerns about whether excessive Chinese lending could exacerbate the strain on Pakistan’s already fragile finances. China’s state-owned lenders are collectively among Islamabad’s largest lenders, accounting for nearly $30 billion of its outstanding debt.

Abid Hasan, an economist and former adviser to the World Bank, believes that ML1 should be “addressed” and said that Pakistan should suspend public investment that earned revenue in rupees but was financed by foreign currency debt. to do

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Saqib Sherani of Macro Economic Insights, a consultancy, said it was unfair to attribute China’s role in Pakistan’s debt crisis when the largest payments in the fiscal year actually came from multilateral lenders.

But according to the AidData research laboratory at the College of William and Mary in the US, Chinese loans have higher interest rates than multilateral or other bilateral creditors. Chinese annual interest rates are typically 3-4 percent, compared with 1-2 percent for OECD lenders, AidData said.

Even as it looks to Beijing for the ML1 project, Pakistan is looking elsewhere for funds to stabilize its dwindling resources. The Ministry of Finance is negotiating with the IMF for the next part of the $7 billion aid program and has said it will turn to “friendly” countries like Saudi Arabia for more loans.

The Sharif government has agreed to stabilize the country’s economy during parliamentary elections, which should be held by the end of this year.

Iqbal said he is confident that the country will move forward. “Pakistan is facing economic problems [and] financial problems, but it is not yet within the scope of the default economy. We are managing very wisely.”


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