Foreign Direct Investment (FDI) is a commercial transaction where an investor from one country invests in a company or institution located in another country. This investment includes the establishment of new businesses or the acquisition of existing ones, making it an essential driver of global economic growth. FDI promotes international trade, creates job opportunities, and boosts the development of host economies. It is the cornerstone and key driver of economic growth and development of a country. China has recently become the leading investor in FDI with Belt and Road initiative. FDI is crucial for developing countries like Pakistan as it helps in addressing its financing gap and improving its infrastructure and seaports. However, the critics have raised concerns over the growing dependencies on China’s FDI and its potential repercussions including falling into debt trap and compromising the state sovereignty (Younas, 2021) .
A decade has passed since the inception of China-Pakistan Economic Corridor (CPEC) , the multi-billion dollars flagship project under president Xi Jinping’s 1.4 trillion dollars Belt and Road Initiative (BRI). The Gigantic BRI programme, 11 times the size of Marshall plan that rebuilt Europe from the ruins of world war 2, aims to revive the fabled “silk road” through new roads, high speed rails, power plants, ports and airports and telecommunication, links to boost trade with in Asia, Middle East, Europe and Africa .The BRI project has been described by former American Assistant Defense Secretary Chas Freeman as “potentially the most transformative engineering effort in human history, because once completed, it could cover more than half of world population and generate GDP of $21 trillion (Hussain, 2023).
According to Naveed Hussain, The CPEC project which has been described as “Game Changer” by Pakistani officials was announced in 2013 during visit of Chinese Premier Li Keqiang to Pakistan, but it received a huge impetus in April 2005 when president Xi Jinping visited the country. Pakistan hailed the CPEC as journey towards ” Economic Regionalization in Globalized world, and as a “Hope of better region with peace, development and growth of economy. The China-Pakistan Economic Corridor (CPEC) is a major component of China’s Belt and Road Initiative (BRI) and its impact on Pakistan’s growth, human development, employment generation(almost 236000 jobs), revenues, environmental impacts and overall development has been widely debated (Zafar.A, 2021).
In terms of growth, the CPEC has brought about significant investment in energy and infrastructure projects, with the aim of boosting economic growth. According to the Pakistan Ministry of Planning, Development, and Reforms, CPEC has already contributed 4.5% to Pakistan’s annual GDP growth. However, critics argue that this growth is not sustainable and will ultimately lead to a debt crisis due to the high costs associated with the projects.
In terms of human development, the CPEC has led to the creation of some employment opportunities, but these have been limited to low and semi-skilled labor. The lack of skilled labor has resulted in many companies bringing in workers from China, which has led to criticism from local groups who claim that the locals are being sidelined from the employment benefits. According to James Schwenlein report “Strategic implications of CPEC” which said that from 2014 to 2019, projects under CPEC proceeded in step with the 2017 master plan. According to data collected by the World Bank, in these first five years of implementation, approximately $32 billion in Chinese investments were under construction, completed, or operational, and feasibility studies had been conducted on an additional $14 billion in projects. Approximately 70 percent of CPEC projects implemented or completed up to date have been in the energy sector, with nearly all of the remainder in the transportation sector (Schwenlein, 2019).
However, it has great challenges and hurdles to face. Many concerns have been raised regarding “Debt Trap Diplomacy” (Chellaney.B, 2017) associated with Chinese investments which shows that these investments may lead to immense debt burden and compromise on economic sovereignty. According to Uzair Younas (senior policy Analyst for S.A program at USIP) the China’s influence in Pakistan during last eight years has increased. Pakistan total external debt stood $ 44.35bn in June 2013, just 9.3 percent was owed to China. By April 2021 it ballooned up to $90.12 billion with Pakistan owing 27.4 percent to China that is $24.7 billion of its total external debt according to IMF ( Younas, 2021).
Moreover, this can be seen in case of Sri Lanka, Maldives, Tajikistan etc, all these and many other countries are affected by debt trap diplomacy where they have accumulated huge amount of debt owed to China due to BRI projects. The Term “Debt Trap diplomacy” was first coined by western policy-makers in 2017 to describe the Chinese take over of Sri Lanka’s ” Hambantota Port” on 99 years lease after the island nation failed to honour its debt commitments (Chellaney.B , Dec 2017). According to Pakistan Institute of Development Economics (PIDE) report China’s debt to Pakistan has witnessed significant increase over the years. In 2017 it was $7.2 billion which increased to $19 billion in 2018. While in 2021 it increased up to $24.7 billion (PIDE n.d). Similarly the project budget is $62 billion but according to Hassan Abbas (Pak-American scholar in south Asian and Middle East studies) the delay in the project will increase the cost up to $98 billion. it will take more than 40 years to pay back debt to china and all these increase in debt raises the concerns about Pakistan ability to manage and repay the loan. Potentially, this increase the risks associated with debt trap diplomacy.
The issue of Chinese Foreign Direct Investment (FDI) and its potential role in leading host countries into a debt trap is multifaceted. Beyond Uzair Younas’ study, various other factors, especially local and national social and political dynamics, contribute to countries’ susceptibility to debt traps a midst Chinese FDI.
Governance and Institutional Factors: A book written by Deborah Brautigam in (“The Dragon’s Gift: The Real Story of China in Africa,”) emphasize that weak governance structures, institutional deficiencies, and corruption within host countries significantly contribute to their vulnerability to debt traps. This is observed in cases across Africa, where inadequate regulatory frameworks and governance issues have amplified debt challenges despite Chinese investments.
Policy Implementation and Transparency: another example of domestic impact is as stated in Kevin P. Gallagher’s work on Chinese finance in Latin America in his book:(new bank in the town); regarding how changes in political leadership and policy priorities can impact a country’s debt sustainability. In instances where transparency and accountability are lacking in policy implementation related to Chinese-funded projects, countries may face higher risks of debt distress.
In the context of Pakistan’s experience with the China-Pakistan Economic Corridor (CPEC), local, social and political dynamics have played a crucial role (Zafar.A,2021). Challenges related to transparency, local stakeholder engagement, and uneven distribution of benefits have fueled concerns. Reports from institutions like the Pakistan Institute of Development Economics (PIDE) and independent analyses have highlighted these concerns. Concerns about governance, project selection, transparency, and the concentration of projects in certain regions have been raised. These issues have led to debates within Pakistan regarding the long-term impact of CPEC on the country’s economy and debt burden.
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of The Global Dynamic or its editorial team.