In this episode for New Wave Global, host Raza Rumi interviewed Yousaf Nazar - former banker with Citigroup and international investments expert - on Pakistan’s severe debt crisis and the impact of extremely high-interest loans from China. Nazar shed light on the failure of multiple governments to expand exports, enhance tax collection, and devise policies to get rid of the debt trap.
He said when the China-Pakistan Economic Corridor (CPEC) program was initiated by the then-government, the project’s total cost was $21 billion out of which $16 billion was in the form of loans, which must be repaid, unlike loans from the World Bank (WB) or Asian Development Bank (ADB), which are typically repaid in a span of 20 or 30 years. This $16 billion loan from China must be repaid in 10 years, as it was borrowed at commercial rates of interest that are 4.5 percent above the liable rate. Nazar further explained, “a big chunk of these projects were in the energy sector, more specifically the power plants, and very high rates of return were guaranteed in terms of return on equity as high as ranging from 27 to 34 percent, so not only those loans have to be repaid, the government also has to make capacity payments because these power plants were constructed under the take or pay sort of agreements, which means even if you cannot buy the whole electricity that is being produced by the power plant, you still have to pay for it. The payment crossed about Rs 2 billion, which is, in dollar terms, $7.5 billion.” If you put it in the context of the economy, capacity payments alone represent about 2% of the GDP, and Pakistan's tax GDP ratio is barely 9%, so you can imagine the strain that has put on the government's finances, Nazar told Rumi.
While talking about the Multan-Sukkur Motorway, he said that the project cost was $2.9 billion, and 90% of this project was financed by foreign currency loans from China. He gave another example of the Orange Line Metro Train Project in Lahore, saying the initial project cost was about $1.6 billion and 90% of it was financed through foreign currency loans. Overall, multiple federal governments have been unable to increase exports for the country, or manage spending, and contributed to the current debt trap.