Understanding Pakistan’s reliance on Chinese debt

The International Monetary Fund (IMF) recently approved a $1 billion bailout for Pakistan, its 24th bailout since 1958. Pakistan’s economy is currently drowned in foreign debt, and one of its foremost creditors is China. As of late 2024, the World Bank identified China as Pakistan's largest bilateral creditor, holding approximately $29 billion in loans, constituting about 22% of Pakistan's total external debt. The overall external debt held by Pakistan is estimated to be roughly $130 billion as of 2024. The pressure of this debt is further amplified by the fact that Pakistan faces a daunting repayment schedule, with approximately $100 billion in foreign debt due within the next four years, including $18 billion in the current fiscal year.

The IMF bailout package was sanctioned to Pakistan while it was involved in a military conflict with India, and these bailout packages have become one of the primary sources of economic sustenance for this country of over 200 million people. The other important source is financial assistance from China in the form of bilateral and commercial debts. 

Figure 1: Various multilateral and bilateral lenders to Pakistan

The driving factor in China’s role in sustaining Pakistan’s economy is the China-Pakistan Economic Corridor, which is part of China’s Belt and Road Initiative (BRI). The BRI is China’s massive infrastructure and development programme, often referred to as China’s ‘New Silk Road.’ Under this initiative, China has sanctioned various connectivity projects in its neighborhood while providing the host countries with loans and investments. The modus operandi of China under this initiative has also created a significant reliance on Chinese debts and investments among several countries, and the same is the case with Pakistan. The China-Pakistan Economic Corridor (CPEC) is Pakistan’s most massive infrastructure and development project financed by China through commercial loans, concessional loans, and some interest-free loans and grants. CPEC is the most significant infrastructure and economic initiative in Pakistan’s history, with an investment value exceeding $60 billion. 

Figure 2: Map of the China-Pakistan Economic Corridor (Credit : RFE/RL)

The CPEC aims to connect Gwadar port in Pakistan to China’s Xinjiang region through a network of roads, railways, pipelines, and special economic zones (SEZs) spanning over 3,000km. It is strategically important to China because then China can develop an alternative to the Strait of Malacca for energy imports, especially oil, from the Middle East. For Pakistan, this project holds economic and developmental importance. China is flushing heaps of money into the project and providing Pakistan with a wide range of loans and grants. However, CPEC has also faced its own set of challenges. A large leg of this project involves construction in Balochistan, and there is considerable resistance to Chinese construction projects by the people of the region. This challenge, coupled with political and economic instability in Pakistan, has added to question marks on the future of CPEC. 

Figure 3: Table showcasing China’s loan distribution to Pakistan under CPEC

The other components of Pakistan’s debt to China have been direct government-to-government loans and other bilateral agreements.  China has frequently provided financial assistance to Pakistan through these channels, often in the form of loan rollovers to help the country manage its immediate financial pressures. A notable example is the $2 billion loan from China that was extended by another year in March 2025, providing crucial support to Pakistan's foreign exchange reserves. Pakistan has also repeatedly sought debt rescheduling from China to alleviate its foreign financing challenges, including requests to rearrange the repayment of $3.4 billion in debt. 

Chinese financial institutions, such as the Industrial and Commercial Bank of China (ICBC) and the China Development Bank, have also been providing Pakistan with commercial loans. These loans often come with higher interest rates compared to the more concessional financing offered by multilateral development banks, thereby increasing Pakistan's debt servicing burden. For instance, Pakistan repaid a $1 billion loan to ICBC in March 2025, which had been obtained two years prior at a floating interest rate of approximately 7.5%. Additionally, China and Pakistan have recently negotiated a currency swap agreement. This agreement also extended Pakistan’s debt repayment window to 2027. 

All these mechanisms have, over the years, led to Pakistan’s reliance on regular financial assistance from China. Pakistan seems to have devised a new economic model solely based on bilateral and multilateral loans and grants - the primary problem with such a model is that it is bound to drown a country in a pile of debts, and this is what has happened with Pakistan. Whether Pakistan will be able to repay the accumulated debts is also another matter of concern. 

Will Pakistan be able to repay this debt?

Pakistan's capacity to repay its debt to China is significantly influenced by its export performance. Over the past two and a half decades, the country's export earnings have stagnated, peaking at around 15% of GDP in the early 1990s and subsequently declining to approximately 8%. This weak export performance severely limits Pakistan's ability to generate the foreign exchange needed to service its external debt obligations. Political stability is another factor that creates conditions conducive to economic development. In the case of Pakistan, the country’s history is fraught with consistent instability in governance, which narrows the space for long-term structural reforms for better economic management. 

These tendencies indicate a tough road ahead for Pakistan in its journey toward economic sustainability. Moreover, the primary multilateral creditor to Pakistan, the International Monetary Fund, has imposed stricter new structural conditions against the most recent bailout. These conditions detail the structural changes Pakistan needs to bring about. The eleven new ones are regarding a governance reform plan, financial sector reform strategy, parliamentary approval of the budget, and development spending commitment, among others. The IMF has also linked these conditions in the current context of the conflict with India and the volatile security situation in the region. The IMF has issued warnings that an active conflict with India could lead to “enterprise risks” and jeopardize the aims of the program of financial assistance. It would not be an overstatement to say that Pakistan is facing an economic crisis of epic proportions. The World Bank, in its latest analysis, projected that Pakistan’s GDP might gradually recover in this financial year but still remain “below low.” 

While this may be a start, it is not a favourable projection for a country drowned in external debt and in need of radical structural reforms.