Pakistan facing what Sri Lanka has faced in 2015

People have once again begun to question if Pakistan is walking in the footsteps of Sri Lanka as its growing engagement with China. The new talk has been sparked by a long article in the New York Times, for the first time, as it provides details as they are unknown about how the Hambantota Port project was conceived and executed.

People have long looked upon this project, which saddled Sri Lanka with debts so large that the country was forced to go to the Chinese asking for rescheduling some of the payments. The request was granted in a deal that saw China swap equity in the project for debt, effectively taking over the port and 15,000 acres of surrounding countryside on which to build an industrial zone. In effect, Sri Lanka had to cede control over strategic territory to China in return for debt relief.

One of the most eye catching details revealed in the article were the ones related to payments made by China Harbour, the company that built Hambantota Port in Sri Lanka, to the close associates of President Mahinda Rajapaksa who approved and launched the project. He was ousted from power after losing the elections in January 2015 to one of his own close associates.

“Chinese officials and the China Harbour company went to great lengths to keep relations strong with Mr Rajapaksa. At least $7.6 million was dispensed from China Harbour’s account at Standard Chartered Bank to affiliates of Mr Rajapaksa’s campaign” the articles states.

Beyond this, the story is a lot familiar for a vanity project, with little to no commercial potential, launched at one to two percent interest rates, an over-eager leader who wanted to accelerate the timeline for completion for political purposes resulting in an escalation of the debt, followed by difficulties in making the repayment. Then the Sri Lankan government borrowed $1 billion from the China Development Bank to make some critical repayments, and eventually faced with a massive debt burden, and had to go to the IMF for a bailout.

One byproduct of the IMF approach was that much of the financing details of Chinese projects had to be opened up before fund authorities, who needed a detailed picture of all inflows and outflows scheduled from any economy that they are bailing out before they can commit to any funds. This took place in June 2016, when the new Sri Lankan government that entered after the elections in the preceding year successfully completed negotiations for a three-year Extended Fund Facility worth $1.5 billion.

“Infrastructure-related FDI from China averaged about $200 million annually over 2013-17 (one-fourth percent of GDP), while outstanding bilateral loans from China to Sri Lanka’s public sector, including SOEs, are estimated at about $4.6 billion at end-2016 (5.8 percent of GDP),” that report says in a special box dedicated to the Chinese investments.

At $46 billion invested in infrastructure projects, with an exchange rate of Rs 124.5 and GDP of Rs 33.397 trillion, you get a ratio of 16.7 per cent between the quantum of Chinese investment to GDP. Compare that to 0.25 percent per year in Sri Lanka over four years.

To be precise, the numbers of the Sri Lanka story are far larger in Pakistan. Exactly how large we do not know yet, Added to this the fact that payment-related outflows on CPEC projects have now commenced since most of them have begun commercial operations, and the figures are set to rise further.

In any event, the financial story of these projects needs closer scrutiny. Now that Pakistan is approaching a moment that Sri Lanka has passed in 2015. There are genuine grounds to be concerned about what exactly it has signed up for in all the CPEC projects, and those concerns deserve to be addressed in a more open manner than what the PML(N) government allowed for.