Pakistan’s Bailout Is Really China’s
The IMF is encouraging moral hazard across the Belt and Road countries.
In all likelihood, Pakistan will seek a $12 billion bailout from the International Monetary Fund this week, its 12th since the 1980s and the largest one yet. This time, the IMF should think twice: Pakistan’s debt crisis isn’t the result of an economic shock. It’s the result of reckless Chinese lending. Any new aid package will only worsen the risk of similar problems arising elsewhere.
Under its Belt and Road Initiative, China extends lavish loans to support infrastructure projects overseas. The catch is that these deals typically require that the money be spent on Chinese goods, services, and labor, and the repayment terms are generally opaque and often onerous.
Pakistan shows how things can go wrong. China is investing some $62 billion across a range of projects there, including roads, ports, energy plants and business parks. It sounds great — until you look at the details. One Pakistani concession guarantees Chinese power plants annual returns of up to 34 percent for 30 years, all backed by the government. By comparison, Pakistan’s 10-year government bond yields have generally fluctuated between 8 and 9 percent over the past year.
Worse, China is lending in U.S. dollars, so Pakistan must run an increasingly large surplus to repay its loans. Unable to export enough to generate a trade surplus, it has rapidly been depleting its foreign-exchange reserves, thus leading it into the arms of the IMF yet again.
Other recipients of China’s largess have come under similar strain. Venezuela secured Chinese loans with oil, then found that it couldn’t sell enough additional crude on global markets to generate the hard currency needed to expand production. After Sri Lanka was unable to repay loans, China took a 99-year concession on one of its ports. Malaysia, Myanmar and Nepal are all reconsidering major Chinese investments, and no wonder.
Belt and Road projects are so risky because their rationale is political, not economic. Enshrined in the Communist Party constitution in 2017, the program is a cornerstone of China’s plans to expand its influence and soft power globally. Most Belt and Road lending is channeled through state-owned policy banks that are more concerned with advancing foreign-policy goals — such as winning over new allies — than with turning a profit.
One result is that credit is often extended with little regard for financial viability or international lending standards. This helps explain why so many of the early Belt and Road recipients have ended up in financial distress. As China expands the program around the world, other projects will almost certainly end in tears. (Laotian high-speed rail comes to mind.)
The IMF needs to be wary of this dynamic. Although it has issued warnings about China’s ever-expanding debt load, it has also repeatedly acceded to Chinese demands. It allowed the yuan to become a reserve currency in 2015, for instance, even though it violated essentially every criterion of a reserve currency. If the IMF fails to take a stand on Pakistan, it will be encouraging moral hazard across the Belt and Road countries.
In considering its aid package, then, the fund should exclude any repayment of Chinese debt or demand an exceptional haircut on it. It must make clear that it distinguishes between commercial projects gone awry and foreign-policy ventures that look an awful lot like a debt trap. If China’s leaders want to splurge overseas on dubious projects, that’s their business. But the IMF shouldn’t have to clean up when things go wrong.