Pakistan is failing, in large part because of its close association with Beijing’s Belt and Road Initiative (BRI).
Because coal mines tend to emit large quantities of poisonous carbon monoxide, miners in the old days would carry a caged canary into the mine with them. The bird’s more delicate constitution would succumb to rising gas levels long before the miners and signal that human life might be in jeopardy. The bird’s death cued the miners to get out. Pakistan, as an early and enthusiastic participant in the BRI, is suffering as a consequence and may well be issuing a signal for other participants to leave this particular “mine.”
Pakistan’s biggest problem centers on the power grid built for the country by the BRI, also known as “One Belt, One Road.” It was expensive from the start, and because China built considerably more generating capacity than Pakistan needs, the burden of debt Pakistan now faces is simply unsupportable.
Tellingly, the problem is not just an unfortunate miscalculation of the sort that occurs frequently when nations invest. More ominously for all BRI participants, it is a feature of how Beijing’s scheme works.
In the scheme, Beijing approaches a less developed nation and offers to build the kind of infrastructure that presumably will help that nation make economic gains. Beijing offers to arrange loans for the recipient to pay for the project, always from state-owned Chinese banks. It also arranges for Chinese contractors to do the construction and for Chinese management to run the project once it is complete.
All the advantages lie on Beijing’s side. If, for some reason, the recipient nation cannot meet the financial obligations of the loan, ownership will revert to Beijing. Even if the recipient nation can repay the loan, that recipient remains beholden to Beijing to sustain the project and make it worthwhile.
There is another source of difficulty. Because Chinese authorities choose the projects, always for political and diplomatic rather than economic reasons, the projects often miss the needs of the recipient nation’s economy or are too large or too small. Since Beijing is using the recipient nation’s money, albeit in a loan, it has little incentive to match the projects to needs. What makes matters worse is that the nations approached by the Chinese regime seldom have the ability to assess the economic needs accurately.
For Pakistan, China’s initial offer, about a decade ago, looked attractive. The country was short of electric generating capacity. China came in and built a whole series of coal, solar, and hydroelectric plants, an effort that cost the equivalent of some $25 billion, a huge sum for Pakistan. In addition to the obligation to repay the loan in only 10 years, Pakistan also had to pledge to take all the electricity generated by the array of Chinese-managed facilities for the next 40 years and further promised the Chinese state companies running them a 34 percent return on the effort.
It should have been obvious from the start that Pakistan could never deliver on these terms. Because the calculations were political and diplomatic rather than economic, China built much more generating capacity than Pakistan will need for many years to come, by some calculations, 40 percent more. But the terms make Pakistan buy all they generate anyway.
To meet all these onerous obligations, Pakistan has raised the price of electricity to higher levels than in some developed and considerably richer nations. Electricity for a few lights, a small refrigerator, and a couple of fans can cost a Pakistani family the equivalent of $60 a month, a steep sum indeed considering that the country’s per-capita income amounts to the equivalent of some $125 a month.
Pakistan is already the equivalent of $1.0 billion in arrears on the debt to Chinese state banks, and that does not include the $9.0 billion more it will owe on two new Chinese nuclear plants.
If Pakistan is any indication, the BRI scheme is fundamentally flawed. What may be worse, the failing participants will force strains on Chinese finance and contractors at a time when China’s debt-heavy, underperforming economy can ill afford it.
