Pakistan is exploiting Chinese credit to modernize its railways despite the debt crisis

Since the 19th century, Pakistan’s intermittent railways have carried passengers and cargo from the Arabian Sea to the Himalayas. But the colonial-era network is in grave disrepair, with rickety trains and some tracks left unusable by last year’s devastating floods.

Along with its close ally China, Pakistan It is now preparing at least a partial solution: a $10 billion renovation of the 1,700km arterial Main Line 1 railway to be paid off with loans from Beijing.

prime minister Shahbaz Sharif President Xi Jinping agreed in November to begin work on the line linking the southern port city of Karachi with Lahore and the capital, Islamabad. The project is expected to increase the maximum speeds of trains on the road to 160 km/h.

But the ML1 upgrade has raised questions about whether heavily indebted Pakistan should borrow billions of dollars more for its expensive infrastructure. A time of severe financial stress.

Some analysts believe Pakistan, which owes about $100 billion in external debt to lenders including the World Bank and China, is at risk of default after its foreign exchange reserves plummet.

Ahsan Iqbal, Pakistan’s planning minister, said the ML1 upgrade was vital to keeping trains running and an example of the transformative work that made Chinese credit possible.

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

“The entire railway system is going to collapse, this main line is going to collapse. It would be too risky to run commercial operations on this track. It is no longer an option. It is an imperative.”

Map of the railway network in Pakistan

But the critics said Take on more debt Project ML1 was an example of the kind of bad borrowing decisions that have led Pakistan into successive economic crises in recent years. Pakistan’s foreign reserves fell to less than $6 billion, or less than one month’s worth of imports.

Zubair Khan, Pakistan’s former commerce minister and IMF official, said the government was “fooling the country,” and said Pakistan was closer to running out of reserves than officials admitted. “There are hidden truths.”

Iqbal who supervises Pakistan’s participation in the Belt and Road Initiative, China International Infrastructure Plan, said it would take six to nine years to complete the ML1 upgrade. The work will include replacing the track, upgrading the signaling, converting level crossings into underpasses or flyovers and building fences to prevent livestock from crossing the line.

The planning minister said the project would proceed in phases to “make it more manageable”, with an initial cost of $3 billion. He said the loan from China would be repayable over 20 to 25 years and would be “soft”, without giving further details.

Column chart of net reserves with SBP (month-end levels, billion dollars) showing declining foreign exchange reserves of the Central Bank of Pakistan

Chinese lending to Pakistan goes back years, as part of an effort to forge economic and military ties that would help counter their common rival India. The ML1 upgrade is part of the China-Pakistan Economic Corridor, a focus of BRI with an estimated total cost of $60 billion.

The China-China Economic Corridor also includes China’s development of a deep-sea port at Gwadar in southwestern Pakistan, among other projects. Beijing separately Supplying the Pakistan Army With eight submarines and advanced J-10C fighter jets.

A Western diplomat in Islamabad said the persistence of such projects even as Beijing sees mounting financial straits in countries beneficiaries of the Belt and Road Initiative indicates the importance it places on relations with Pakistan.

Even if the rest [of BRI] The diplomat said China wants to keep track with Pakistan, lagging behind, adding that the relationship has “important military aspects that have developed in the long term.”

The projects — and Chinese funding — have also inflamed domestic tensions. Police in Gwadar last month imposed emergency measures and dismantled a protest camp that had obstructed operations at the port demanding, among others, Chinese nationals to leave.

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

Projects such as ML1 have also raised concerns among analysts about whether excessive Chinese lending is exacerbating pressures on Pakistan’s precarious finances. Chinese state lenders are among Islamabad’s largest creditors, accounting for about $30 billion of its outstanding debt.

Abid Hassan, an economist and former adviser to the World Bank, said ML1 should be “delayed”, saying Pakistan should suspend public investment that yields revenue in rupees but was funded with foreign currency debt.

It is unfair to single out China’s role in Pakistan’s debt woes, said Sakib Sherani, of consultancy Macro Economic Insights, who is credited with making the largest payments in the current fiscal year to multilateral lenders.

But Chinese loans tend to carry higher interest rates than multilateral or other bilateral creditors, according to the AidData research lab at William & Mary College in the US. China’s annual interest is typically 3-4 percent, AidData said, compared with 1-2 percent for OECD lenders.

Even as it is outsourcing Beijing for the ML1 project, Pakistan is looking elsewhere for funds to help stabilize its shrinking reserves. The Finance Ministry is in talks with the International Monetary Fund to secure the next tranche of the $7 billion aid programme, and has said it will reach out to “friendly” countries such as Saudi Arabia for more loans.

Sharif’s government is betting that it can stabilize the economy in time for parliamentary elections, which must be held before the end of this year.

Iqbal said he was confident the country would succeed. Pakistan is facing the economy [and] Financial difficulties, but not on the scale that the virtual economy has become so far. We manage very wisely.”

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