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EFSAS Commentary

The cost of indulging in China-financed excesses for the struggling Sri Lanka and Pakistan


Over the past week, Sri Lanka formally launched talks with its major creditors to restructure the island nation’s debt. The meeting was held without the participation of China, Sri Lanka’s biggest bilateral lender and a major contributor to the nation’s severe economic crisis. This is being seen as a sign of China’s reluctance not only to stand in support of the struggling poor nations that it entrapped in debt woes, but also for its share of the responsibility in pushing such countries into deep distress. In Pakistan, meanwhile, the China Pakistan Economic Corridor (CPEC), the flagship project of China’s contentious Belt and Road Initiative (BRI), has created serious socio-economic problems and is coming up against stiff headwinds. Despite the efforts of the Pakistani government and the military establishment, both of which have profited from the CPEC at the expense of the common man, to downplay the popular resistance against the perceived Chinese exploitation, the last few days have seen opposition to the CPEC come to the fore in multiple manners.

Bloomberg, in a 15 April article titled ‘China left out of Sri Lanka debt talks amid angst over delays’, reported that with the aim of injecting new momentum into Sri Lanka’s debt talks that had been caught in a standoff between China and other lenders over how best to deal with the island nation’s debt problems, finance chiefs from India, Japan and the Paris Club of sovereign creditors held a joint briefing with the International Monetary Fund (IMF) on 13 April in Washington. The briefing was meant to mark the start of the restructuring process, and it was held a day after China agreed to soften some of its demands during a roundtable convened by the IMF and the World Bank to hammer out broader guidelines for providing debt relief to low-income countries. Those discussions are due to continue in the months ahead, with significant issues still unresolved. Hanging over those wider talks have been concerns about China’s role in negotiations involving countries like Sri Lanka and Zambia, which are facing increasing economic strains because of slow progress in resolving their debt issues.

Sri Lanka and its creditors have said that they would like China to participate in restructuring discussions. Sri Lanka’s junior Finance Minister said that all creditors had been invited to join the new initiative. Sri Lanka central bank governor Nandalal Weerasinghe in an interview called for an early resolution of the restructuring talks. “It’s in the best interest for China and Sri Lanka both to complete this process soon and we can get back to repaying our distressed obligation. We have to make sure that we do it as soon as possible”, he stressed. However, people familiar with the talks said they are also eager not to let Beijing hold up negotiations any further. IMF deputy managing director Kenji Okamura said after the briefing that the participants aimed to complete Sri Lanka’s debt reworking by the first review of the nation’s IMF program, which is expected in September, based on fund norms. He added, “Sri Lanka remains in a deep debt crisis and expeditious debt resolution is fast needed for Sri Lanka to emerge as quickly as possible from its crisis. We hope all official bilateral creditors can participate and the negotiations can progress swiftly”. The IMF had approved a $3 billion four-year bailout for Sri Lanka on 20 March and had urged a speedy resolution of debt-restructuring talks.

Other officials in the briefing also called for all creditors to participate. Japanese Finance Minister Shunichi Suzuki said that China had been invited to the talks but had not responded over its participation. Suzuki said the framework for the Sri Lanka talks had been negotiated by Japan, India and France as the traditional representatives of the Paris Club of creditor countries. He said he hoped the Sri Lanka talks would become a model for negotiations with other nations. “We want China to participate in talks very much”, Suzuki told reporters. “China is a large creditor. The talks should take place on an equal footing with decisions made after negotiations using transparent debt data”. Just over $14 billion of Sri Lanka’s total foreign debt is bilateral debt to foreign governments, 52 percent of which is owed to China.

The Bloomberg report added, “One person familiar said Sri Lanka had committed not to negotiate a separate debt deal with China, which has been a concern for other creditors”. Suzuki had also cautioned the previous day that it would be unfair if some nation held bilateral talks and secured benefits before others. However, David Loevinger, a sovereign analyst at TCW Group Inc. and former United States (US) Treasury Department senior coordinator for China affairs, believes that “Given the relationship between Japan, India, the Paris Club and China — and that none of them have as much skin in the game — the chances that China would join a group led by them was somewhere between slim and none”. He added that China “will likely go its own way in dealing with Sri Lanka”.

Responding to a question on Sri Lanka and its major creditors formally launching debt-restructuring talks without China, China’s Foreign Ministry spokesman, however, said “I would like to reiterate that China calls on commercial and multilateral creditors to jointly participate in Sri Lanka’s debt restructuring under the principle of fair burden-sharing. We have been in close communication with Sri Lanka and supported Chinese financial institutions in actively discussing debt treatment arrangements with Sri Lanka”.

While this has been playing out, Pakistan’s troubles with the CPEC have come at a difficult time for Islamabad. Amid the prevailing insecurity, political chaos and economic turmoil,  Asian Lite International reported this week that several prominent international corporations including Siemens, Proctor & Gamble, Oracle Services Pakistan, IBM Pakistan, FedEx, Marriot Hotels, Troy Group Inc., Grey Mackenzie Restaurant (the master franchise of KFC in Pakistan), and 3M Pakistan, are considering closing their operations in the country due to institutional barriers and Pakistan’s strict foreign exchange regulations, which they say are adversely affecting their businesses.

These international corporations, however, are not the only ones rolling down their shutters in Pakistan. Nikkei Asiareported that the Karachi police had found itself constrained to shut down businesses run and frequented by Chinese nationals in the city. It added that local media reports had quoted officials as saying that “Despite repeated warnings, several Chinese-owned businesses failed to implement security protocols, leading to their sealing until satisfactory security arrangements are made”.

The move, the officials added, was necessitated to prevent impending terrorist attacks against these businesses, about which intelligence alerts had reportedly been issued. Any such attack would have adversely impacted Islamabad’s strategic relationship with Beijing. Various terrorist groups operating in Pakistan such as the Baloch Liberation Army (BLA) and the Tehreek-e-Taliban Pakistan (TTP) have for the past several years targeted Chinese nationals and projects connected to the CPEC. These groups believe that China is slowly encroaching on their lands using commercial projects, mining operations, and other financial incentives as tools. The local people gain little from these projects.

China, on the other hand, is unhappy that several terrorist attacks against Chinese nationals and interests in Pakistan have been allowed to occur in the last couple of years.  In January this year, Chinese Foreign Minister Qin Gang conveyed quite clearly to his Pakistani counterpart Bilawal Bhutto Zardari that “The Chinese side is highly concerned about the safety of Chinese citizens in Pakistan and hopes that the Pakistani side will continue to take strong security measures”. A few weeks ago, China had temporarily closed the consular section of its Embassy in Islamabad just days after advising Chinese citizens to remain cautious due to the “deteriorating security situation” in Pakistan.

The problems that China is creating with the CPEC, and suffering on account of it, have sometimes manifested themselves in unexpected ways. A Chinese manager at a hydroelectric plant was on 17 April charged with blasphemy in northern Pakistan after angry workers surrounded his office and accused him of insulting the Prophet Mohammad. The Chinese national, Tian, had appeared before a tribal council, or jirga, and had questioned the time taken off by workers at the plant to pray while on duty during Ramadan, the Islamic month of fasting. His Pakistani interpreter alleged that Tian had used abusive language against Allah and Prophet Mohammed during the heated conversation. Police moved in as an enraged crowd gathered at the Dasu hydropower project in Kohistan district of the restive Khyber Pakhtunkhwa province. The Dasu project is a major venture under the CPEC. The crowd was brought under control, but it assembled again and blocked the Karakoram Highway, which links Pakistan with China, demanding the Chinese national’s arrest.

Police official Naseer-ud-Din Khan said that officers then took the man to a safer location. The following morning, hundreds of agitated Pakistanis stormed the main district police station, believing that the man was being sheltered in the building. Khan said the crowd attacked the police station as officers were preparing the prosecution paperwork, adding that “The mob dispersed only after they were shown a copy of the case registered on blasphemy charges”. Blasphemy under Pakistani law is a crime that can be punishable with death. Rights groups say hundreds of people are languishing in prison accused of blasphemy as judges delay trials, fearing retribution against themselves.

Tian, meanwhile, had been whisked away to Abbottabad on an Army helicopter as the police feared the agitated locals would harm him. Mohammad Khalid, District Police Officer (DPO) Upper Kohistan, was quoted as saying that “We have arrested the foreigner suspect under blasphemy and terrorism charges and airlifted him from here to present him before the anti-terrorism court (ATC) in Abbottabad”. The Dawn daily reported that he had been booked on blasphemy charges and sent to prison on a 14-day judicial remand by an Abbottabad anti-terrorism court.

Tian denied the accusations and claimed he had been falsely accused. He told the Joint Investigation Team (JIT) constituted by the government to investigate the matter that “I can’t even contemplate offending sentiments of Pakistanis and Muslims, but whatever I have been facing here is nothing but a lie”. Keen not to offend China, media reports said that the Pakistani establishment had taken extraordinary precautions to protect the Chinese manager, and had lodged him in a top security location to avoid mob attacks. He was later moved to Islamabad by helicopter.

The Chinese Foreign Ministry, quite naturally, expressed concern at the unexpected development and said that its mission in Islamabad was verifying the situation regarding its national. A spokesman of the ministry said at a media briefing in Beijing that “The Chinese government always asks Chinese nationals overseas to abide by laws and regulations of the host countries and respect local customs and traditions”. He added that “If the incident involves Chinese nationals, our Embassy will provide consular protection and assistance within the purview of its duty”.

The security challenges for Chinese nationals in Pakistan and Afghanistan are only likely to become more complex as China seeks to expand the controversial CPEC in the region, and as the world’s top sovereign creditor, China’s role in the rescue efforts for Sri Lanka will be watched very closely by other indebted nations and those contemplating hitching on to the Chinese bandwagon.