The hidden cost of hefty borrowing

KARACHI:

Pakistan's recent move to secure a $3.3 billion loan package from Chinese banks has once again placed its economic dependence on Beijing in sharp focus. The deal, which includes a $2 billion syndicated loan and a $1.3 billion refinancing arrangement, is intended to provide much-needed short-term relief to Pakistan's low foreign exchange reserves.

In June 2025, following the disbursement of these funds, the reserves rose to nearly $15 billion, offering a temporary cushion equivalent to about two months' worth of imports. However, beneath the surface of this fiscal reprieve lies a complex web of financial vulnerabilities and strategic risks that could undermine Pakistan's long-term economic sovereignty.

China has emerged as Pakistan's largest bilateral lender, with outstanding loans exceeding $29 billion. Much of this lending is linked to infrastructure development under the China-Pakistan Economic Corridor (CPEC), a central component of China's Belt and Road Initiative (BRI).

While CPEC projects have brought critical improvements in energy generation, transport connectivity, and logistics, they have also saddled Pakistan with an increasing debt burden. Many of these loans are non-concessional, meaning they carry higher interest rates. Additionally, several Chinese-backed energy projects include capacity payment clauses that obligate Pakistan to make fixed payments regardless of power consumption, leading to billions in annual outflows. This contractual structure places sustained pressure on Pakistan's already overextended public finances.

The current loan deal underscores a pattern that has developed in recent years: instead of retiring its obligations, Pakistan has increasingly relied on refinancing maturing Chinese debt. While this approach alleviates immediate liquidity crises, it does little to improve long-term sustainability.

Refinancing delays the inevitable, creating a revolving door of repayments that expands the debt stock without addressing underlying structural weaknesses.

As Pakistan's access to Western credit diminishes due to poor reform implementation and global risk perceptions, Chinese loans appear increasingly attractive because they are disbursed quickly and without stringent conditions. However, this convenience increases China's leverage over Pakistan – not only economically but diplomatically.

The growing financial relationship shapes Pakistan's foreign policy calculus, particularly in matters related to India, the United States, and broader regional alignments.

Efforts to diversify external financing have yielded some support. The World Bank recently approved a ten-year, $20 billion support package aimed at structural reform and development financing. Additionally, Pakistan remains under the IMF's Extended Fund Facility, which offers periodic tranches of funding subject to conditions such as tax reform, energy subsidy cuts, and improved fiscal management.

Yet successive governments have struggled to meet these reform benchmarks, weakening credibility and leading to repeated interruptions in disbursement. In contrast, Chinese funding is politically less sensitive, often directed at visible infrastructure projects and devoid of institutional scrutiny, which makes it more attractive to policymakers under short-term political pressure.

Without internal reforms, external financing — no matter how generous or immediate — cannot create sustainable stability. The challenge is not merely about securing foreign funds but about using those funds to build institutional capacity, diversify the economy, and reduce dependency. Continued borrowing without a parallel commitment to reform merely postpones the crisis and locks Pakistan into a cycle of debt and vulnerability.

Moreover, the bilateral nature of Chinese lending can undermine Pakistan's position in global credit markets. Multilateral lenders and private investors closely monitor sovereign debt profiles, and overreliance on one creditor can affect Pakistan's risk rating, borrowing costs, and diplomatic flexibility. Questions around repayment capacity, especially in light of high annual debt servicing requirements, may erode investor confidence and reduce future funding opportunities.

The latest $3.3 billion package offers short-term relief but does little to change the fundamentals. It is, in essence, a temporary fix that masks a growing problem. Every loan signed without reform commitments increases Pakistan's exposure to future crises.

To move beyond this precarious cycle, Pakistan must take control of its economic trajectory. That means implementing broad-based reforms to expand the tax base, restructure public enterprises, improve energy sector efficiency, and enhance transparency in debt contracting. Only then can external financing serve as a tool for growth rather than a source of dependency.

Multilateral lenders may impose tough conditions, but their long-term orientation and oversight mechanisms offer a pathway to resilience that bilateral loans alone cannot provide.

In the short run, the Chinese loan provides breathing space and may help avoid immediate balance-of-payments crises. But in the long run, the real question is whether this dependence on a single creditor compromises Pakistan's ability to make independent economic choices.

For Pakistan to secure a sustainable future, it must shift from firefighting to reform, from short-term relief to long-term resilience. The time to act is now.

The writer is a member of PEC and holds a Master's in Engineering