Pakistan’s mounting debt crisis and its increasing reliance on China for financial and military support pose significant strategic challenges for India. With Pakistan seeking larger bailout packages from international lenders and extensive support from China, this dependency has far-reaching implications. This article examines Pakistan’s debt situation, its strategic alignment with China, and the potential consequences for India.
A team from the International Monetary Fund (IMF) arrived in Pakistan last Friday to engage in discussions regarding a request for a larger and longer bailout package under the Extended Fund Facility (EFF). Pakistan, facing financial difficulties, requires a rollover of approximately $12 billion in debt from key allies in 2024-25 to bridge the substantial $23 billion gap in its external financing. Pakistani officials are optimistic about securing a rollover of $5 billion from Saudi Arabia, $3 billion from the UAE, and $4 billion from China. Additionally, they are actively seeking fresh financing from China, which has already provided developing nations with loans exceeding $1.1 trillion through its Belt and Road Initiative (BRI). Notably, a 2023 Aid-Data report reveals that 80 percent of these loans are extended to financially distressed countries like Pakistan.
Despite the significant debt burden, Pakistan continues to allocate substantial funds towards defense expenditures. In 2023, its defense budget amounted to $8.5 billion, marking a 16 percent increase despite the close scrutiny of the IMF. This budget accounted for 1.7 percent of the country’s GDP. Simultaneously, Pakistan has been engaged in discussions with China to enhance its fleet by adding more JF-17 and J-10 CE aircraft, while also expressing interest in acquiring fifth-generation J-31 fighters. Furthermore, Pakistan is collaborating with Turkey to develop their own fifth-generation ‘Kaan’ fighter aircraft and unmanned aerial vehicles.
Pakistan’s Debt Crisis
IMF Bailout and External Financing Needs
An International Monetary Fund (IMF) team recently arrived in Pakistan to discuss a larger bailout package under the Extended Fund Facility (EFF). Pakistan, facing a severe cash crunch, needs around $12 billion in debt rollovers from key allies to address a $23 billion gap in external financing for 2024-25. The country is banking on $5 billion from Saudi Arabia, $3 billion from the UAE, and $4 billion from China, alongside fresh financing from China.
Rising Debt and Defence Spending
Despite its financial woes, Pakistan continues to allocate substantial funds to defense. The 2023 defense budget stood at $8.5 billion, a 16 percent increase, representing 1.7 percent of GDP. This expenditure persists even as the country struggles with a growing foreign debt estimated at $124.5 billion, constituting 42 percent of GDP. Pakistan’s current account deficit for 2022-23 was $30.5 billion, primarily covered by remittances and new foreign borrowing.
China’s Role in Pakistan’s Debt
Belt and Road Initiative (BRI)
China’s Belt and Road Initiative (BRI) has provided over $1.1 trillion in loans to developing countries, with 80 percent of these loans going to nations in financial distress, such as Pakistan. The China-Pakistan Economic Corridor (CPEC), a flagship BRI project, involves $62 billion in spending. However, the financial details of CPEC remain opaque, and significant debt owed to Chinese companies is not officially reported.
Reliance on Chinese Support
Given Pakistan’s economic difficulties, it heavily relies on China for debt relief and fresh financing. However, China’s financial sector also faces challenges, which may limit the extent of concessions Pakistan can expect. Additionally, Chinese lenders are known for extracting stringent terms, as evidenced by the leasing of parts of Gwadar port and special economic zones.
Strategic and Military Cooperation
Deepening Military Ties
Despite economic turmoil, Pakistan and China maintain robust strategic and military cooperation. This partnership is crucial for China, given Pakistan’s strategic location for access to West Asia, Africa, and the Indian Ocean Region (IOR). Military collaborations include the co-development of the JF-17 fighter jet and other defense projects. Pakistan is also in talks to acquire more Chinese military hardware, such as the J-10 CE fighters and the HQ-9/P AD system.
Infrastructure and Defence Projects
China has been instrumental in helping Pakistan build its military industrial complex. Joint projects include the development of submarines, frigates, and nuclear power plants. China has also assisted Pakistan in upgrading its aviation capabilities, with the JF-17 program being a significant milestone.
Implications for India
Strategic Challenges
The Sino-Pakistani alliance poses a two-front challenge for India. The deep military cooperation between China and Pakistan, combined with their strategic alignment on issues such as Kashmir and Tibet, complicates India’s security landscape. China’s infrastructure developments in Tibet and Xinjiang, along with the CPEC passing through contested areas, further exacerbate tensions.
Economic and Military Balance
India must carefully balance its economic and military strategies to counter the combined threat from China and Pakistan. Enhancing indigenous defense capabilities and reducing reliance on foreign arms, particularly from Russia, is critical. Increasing the defense budget to at least 2.5 percent of GDP and accelerating the development and deployment of advanced military technologies are essential steps.
Diplomatic and Strategic Alliances
Strengthening diplomatic and strategic alliances with Western democracies and regional partners is vital for India. Collaborations in defense technology, intelligence sharing, and joint military exercises can enhance India’s capabilities and preparedness. Building a robust network of alliances can help counterbalance the Sino-Pakistani nexus.
What is the extent of Pakistan’s debt crisis?
Pakistan’s foreign debt is estimated at $124.5 billion, or 42 percent of GDP. The country faces a $23 billion gap in external financing for 2024-25 and relies heavily on debt rollovers and new loans from key allies, including China.
How does China’s support impact Pakistan’s debt situation?
China’s financial support, primarily through the Belt and Road Initiative (BRI), has led to significant debt accumulation for Pakistan. The financial terms often involve stringent conditions, impacting Pakistan’s economic sovereignty.
What are the strategic implications of the Sino-Pakistani alliance for India?
The deep military and strategic cooperation between China and Pakistan poses a two-front challenge for India. This alliance complicates India’s security landscape and requires a balanced approach in defense and diplomacy.
How should India respond to the Sino-Pakistani threat?
India needs to enhance its indigenous defense capabilities, reduce reliance on foreign arms, increase its defense budget, and accelerate the development of advanced military technologies. Strengthening diplomatic and strategic alliances with Western democracies and regional partners is also crucial.
What role does the China-Pakistan Economic Corridor (CPEC) play in this context?
CPEC is a significant component of the Sino-Pakistani alliance, providing strategic and economic benefits to both countries. However, the financial terms and lack of transparency in CPEC projects pose challenges for Pakistan’s economic stability.
What are the broader geopolitical implications of Pakistan’s reliance on China?
Pakistan’s reliance on China affects regional stability and geopolitical dynamics, particularly in South Asia and the Indian Ocean Region (IOR). It underscores the need for India to build strong alliances and enhance its strategic capabilities.
Conclusion
Pakistan’s increasing debt and reliance on China for economic and military support have profound implications for India. The strategic partnership between China and Pakistan poses significant challenges, requiring India to adopt a multifaceted approach in defense, diplomacy, and economic policy. By enhancing indigenous capabilities, forging strong alliances, and strategically balancing its resources, India can navigate the complex geopolitical landscape and safeguard its national interests.
