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Belt and Road

Pakistan Belt and Road railway hits snag as China nixes low rate

Islamabad turns to G-20 for debt relief after Beijing reluctant to negotiate

A laborer digs in preparation for the replacement of concrete sleepers along a railway track in Karachi in Jan. 2018.   © Reuters

KARACHI -- The Main Line 1, or ML-1, railway project, the largest in China's Belt and Road Initiative in Pakistan, has run into trouble as Beijing is reluctant to finance the project at the 1% interest rate demanded by Islamabad.

ML-1 is the biggest initiative in the China-Pakistan Economic Corridor, or CPEC, with a price tag of $6.8 billion. With 2,655 km of track, it connects Karachi in the South to Peshawar in the North of Pakistan. Sheikh Rashid Ahmed, the federal minister of railways, claimed that ML-1 will provide jobs for 150,000 people in Pakistan.

The country will invest 10% of the project cost as equity, and will bear the remaining 90% through a Chinese loan under the CPEC framework. Only Chinese companies are eligible to bid on the project, according to the state-owned newspaper China Daily.

It will be executed in three phases because the International Monetary Fund, or IMF, does not allow Pakistan to borrow more than $2.5 billion at one time, as part of its Extended Fund Facility to help weather structural imbalances by bolstering foreign reserves.

According to Pakistan Railways, work on the first phase is scheduled to start from January 2021. However, after the hesitation showed by Beijing on agreeing to borrowing terms, the ML-1 project is unlikely to start on schedule.

China's President Xi Jinping, right, shakes hands with Pakistan's Prime Minister Imran Khan before a meeting at the Great Hall of the People on April 28, 2019 in Beijing.   © Getty Images

Experts believe that Beijing is using delaying tactics so that it does not end up agreeing to a bad deal.

"Beijing doesn't want to say no [to ML-1], it wants to appear committed in Pakistan, but at the same time it is aware of the risky environment for Chinese investments," said Jeremy Garlick, an assistant professor at the Jan Masaryk Centre of International Studies at the Prague University of Economics and Business. "Instead of turning down the request, China delays by offering an investment but putting up an obstacle to the final agreement to delay things," Garlick told Nikkei Asia.

Krzysztof Iwanek, head of the Asia Research Center at Warsaw's War Studies University, believes that very often what is being globally presented as 'Chinese investment' turns out to be Chinese loans. "CPEC is being built through Chinese loans too," Iwanek told Nikkei, adding it is little surprise that Beijing seeks a good return on most of the CPEC projects.

Andrew Small, a senior transatlantic fellow at the German Marshall Fund of the United States, is of the view that China has been flexible with Pakistan on the back-end but has generally been a bit tougher on the initial terms of the deals. "This is partly because [China] want[s] to ensure that projects are viable enough to make financial sense even under tighter conditions," Small told Nikkei. "They have been consistently reluctant to slash interest rates on new or existing projects but consistently willing to inject financing into the Pakistani economy when needed," he said.

Against this backdrop, Pakistan has secured temporary debt relief of $3.2 billion under the G-20 COVID-19 Debt Service Suspension Initiative. Although a small amount considering Pakistan's external debt, it will provide Islamabad with some breathing space at a time when Beijing is showing its reluctance to fund infrastructure projects in Pakistan.

Garlick, the author of "The Impact of China's Belt and Road Initiative: From Asia to Europe," believes that G-20 debt relief can temporarily stem the tide, but can't hide that Pakistan needs long-term solutions to deal with its chronic lack of foreign reserves. "If conditions get really tough, Pakistan may have to back down and accept the Chinese loan at an interest rate closer to China's stated rate," he said.

China's opaque loans to Pakistan are also an impediment in Pakistan getting further loans from Western countries. "Global lenders want greater transparency on what China is up to before being willing to make certain moves themselves -- they don't want to be in the position of de facto bailing out Chinese lending institutions," Small said.

With no further possibility of getting loans from Western nations, Islamabad is left with no choice but to seek them from China for projects it considers economically significant, as not all China-backed projects have come to a halt: Orange Metro Train Lahore, Pakistan's first metro train service built at a cost of $1.6 billion under the CPEC framework, was launched passenger service on Sunday.

But experts have doubts about the ultimate economic success of the ML-1 project which will increase Pakistan's external debt by $6 billion.

Small says that like many big rail projects, ML-1 is not going to generate significant direct returns. Its success essentially relies on delivering other positive externalities. For example, it will reduce costs and delivery times for large freight in Pakistan. It can also help revive the nation's railways, which are on the verge of collapse.

Garlick shares the same view. "Why would a railway line produce 150,000 jobs? It would produce some jobs, but it is not likely that the effects will be as rosy as the Pakistani government is claiming," he said.

He added that the government of Pakistan's claims concerning Chinese investments and CPEC generally have been exaggerated from the start. "There is a track record from the Pakistani side of claiming that CPEC will be a 'game-changer,' but so far after five years there is no sign of any game being changed," he said.

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