Pakistan taps Chinese credit for railway upgrade despite debt crisis

Since the 19th century, Pakistan’s railways have transported passengers and cargo from the Arabian Sea to the Himalayas. But the colonial network is badly damaged, with damaged trains and some roads that were rendered unusable by last year’s devastating floods.

Along with its close partner China, Pakistan is now preparing part of the solution: a $10bn renovation of its 1,700km Main Line 1 railway to be paid for with loans from Beijing.

Prime Minister Shehbaz Sharif and President Xi Jinping agreed in November to start work on the line, which connects the southern city of Karachi to Lahore and the capital Islamabad. The project is expected to increase the speed of trains on the route to 160kph.

But the ML1 upgrade has raised questions about whether Pakistan should borrow heavily in billions of dollars for expensive assets at a time of financial crisis.

Some analysts believe Pakistan, which owes about $100bn in external debt to lenders including the World Bank and China, is at risk of default. after the decline in his savings.

According to Ahsan Iqbal, the minister of planning of Pakistan, the improvement of ML1 is very important in order to continue the railways and it is an example of the change of work that China was able to achieve.

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

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“The entire railway system will collapse, this main line will collapse. Doing business on this path would be very risky. It’s not a choice. It is important.”

Map of Pakistan's railway network

But critics say the massive debt for the ML1 project is an example of the bad borrowing decisions that have led Pakistan to economic crises in recent years. Pakistan’s foreign reserves have fallen below $6 billion, or the equivalent of less than one month’s worth of imports.

The government is “fooling the country”, said Zubair Khan, Pakistan’s former industry minister and IMF official, who argued that Pakistan was close to bankruptcy. savings than disclosed by the officials. “There are hidden truths.”

Iqbal, who oversees Pakistan’s participation in the Belt and Road Initiative, China’s international infrastructure program, said it will take six to nine years to complete the ML1 upgrade. The work will include changing the route, modernizing the signs, converting the high points under the roads or intersections and building fences to stop the cattle from crossing the line.

The planning minister said the plan would proceed in stages “to be more manageable”, with an initial cost of $3bn. The loan from China will be repaid over 20 to 25 years and will be “satisfactory”, he said, without giving further details.

Column chart of reserves with SBP (month-end balance, $bn) showing the decline in reserves of Pakistan's central bank.

China’s long-standing loans to Pakistan are part of an effort to build economic and military ties to help counter its arch-rival India. The development of ML1 is part of the China-Pakistan Economic Corridor, a center of the BRI with a total cost of $60bn.

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The CPEC also includes China’s development of a deep-sea port in Gwadar in southwest Pakistan, among other projects. Beijing is supplying Pakistan’s military with eight fighter jets and J-10 C fighter jets.

A Western minister in Islamabad said that for such work to continue as Beijing sees the growing financial crisis in the countries receiving the BRI, he pointed to the importance of building relations with Pakistan.

“Even if it’s left over.” [of BRI] in the background, China wants to stay on track with Pakistan, “said the minister, adding that the relationship had” important military units developed for a long time.

The projects – and the Chinese funding – have also created tensions within the family. The police in Gwadar last month carried out emergency operations and broke up a protest camp that disrupted activities at the port and demands, among others, for the Chinese to leave.

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

Projects like ML1 have also raised concerns among analysts as to whether China’s large loans are increasing the pressure on Pakistan’s finances. China’s state-owned lenders are among Islamabad’s largest creditors, with about $30 billion of its unpaid debts.

Abid Hasan, a businessman and former adviser to the World Bank, argued that ML1 should be “put aside”, saying that Pakistan should stop investing in government funds that generated revenue. in rupees but it was financed by external debt.

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Sakib Sherani of consulting firm Macro Economic Insights says it is unfair to isolate China’s role in Pakistan’s debt crisis, and that most of the repayments in the current financial year are now it is caused by many loans.

But Chinese loans tend to have higher interest rates than most countries or other lenders, according to the AidData research lab at William & Mary college in the US. China’s annual interest rate is typically 3-4 percent compared to 1-2 percent from OECD countries, AidData said.

Even as Beijing pitches in for the ML1 project, Pakistan is looking elsewhere for funds to help shore up its reserves. The finance ministry is in talks with the IMF to secure the rest of the $7bn aid program, saying it will approach “friendly” countries like Saudi Arabia for more loans.

The government of Sharif is hoping that the economy can be stabilized in time for the parliamentary elections that should be held before the end of this year.

Iqbal said, he believed that the country would prosper. “Pakistan is facing economic crisis [and] financial difficulties, but not in the form of an economic crisis at this time. We are conducting it prudently.”


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