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Explained | Financial Crisis Brewing In India's Backyard

Experts believe that the Chinese debt trap is a tool for President Xi Jinping to fulfill his dream to expand across South Asia and gain strategic and political leverage against its rival, especially India

Photo Credit : merriam-webster.com

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Recently, Chairman of Karakoram National Movement, Mumtaz Nagri has said that Pakistan may cede Gilgit Baltistan, the Pakistan-occupied Kashmir region, to China on lease to pay off its increasing debt. The recent statement sent shockwaves across the region and travelled through the border to India. 

The heavily isolated and neglected Gilgit Baltistan could turn into a future battleground for the world powers to compete, Nagri was quoted by Al Arabiya Post as saying. 

Pakistan, a strong ally of China, is under heavy debt and experts say that it can meet a similar fate as Sri Lanka. As per the Economic Survey of Pakistan (2021-22), China’s mounting debt has reached USD 87.7 billion outstanding. Islamabad owes more than USD 14 billion to Beijing.

Failing currency, high inflation and the worst balance of payments along with political turmoil acted as a fuel to the fire. Interestingly, Pakistan is unable to solve these issues without involving China, which could further lead to more debt traps. 

Pakistan, Sri Lanka and a few other countries are prime examples of the Chinese ‘debt trap’ narrative, where China sharply pushes developing nations into building large infrastructure projects using Chinese loans. 

However, when these countries are unable to pay back their loans, they have to hand over the infrastructure projects to Chinese authorities. Sri Lanka had to hand over control of the Hambantota port to China for 99 years as part of the loan repayment process.

For India, if Islamabad leases disputed Gilgit Baltistan to Beijing, it will be a major strategic and political setback as China will be one step closer.

Amid the economic chaos, the new government has increased the defence budget by 11 per cent. However, the spending on the development sector has been reduced by 11 per cent, health (31 per cent), education (1.5 per cent) and housing (77 per cent).

Inflation in Pakistan reached the highest level in over two years in May on rising food and fuel prices. Talking about the consumer prices, it increased to 13.8 per cent this month as compared to a year earlier, the data released by the government showed. 

Meanwhile, its central bank has already raised interest rates by 675 basis points to curb rising prices. Prime Minister Shehbaz Sharif also said that the government will impose a 10 per cent "super tax" on large-scale industries earning profits of over Rs 300 million to support the country. 

The data released by the State Bank of Pakistan (SBP), showed that the country's foreign exchange reserves declined by 8.32 per cent on a weekly basis. SBP registered the foreign at USD 8,237.7 million on June 17, down USD 748 million compared with USD 8,985.3 million on June 10. The decline took place majorly due to external debt repayments, the bank said. 

Pakistani finance minister Miftah Ismail took to Twitter and wrote, "Early this morning, the Government of Pakistan has received a MEFP from the IMF for combined 7th and 8th reviews."

According to the media reports, the government wants to seal an agreement with the IMF to revive the USD 6 billion programme prior to the approval of the federal budget for the upcoming fiscal year 2022-23.

Nepal

With a situation similar to debt-ridden Pakistan and crisis-hit Sri Lanka, many fear that Nepal is also heading in the same direction amid depleted forex reserves, rising imports and soaring inflation and high payments imbalances. 

As the Himalayan state witnessed sharp growth in imports, the trade deficit rose to the extent of USD 9.5 billion in the first eight months of the current fiscal year (FY). Notably, this is close to the entire budgetary amount of the Nepal government. Nepal’s Finance Minister Janardan Sharma, however, refuted any sign of an economic crisis in the country. 

The foreign exchange reserves of Nepal have been struggling since the beginning of the current FY. According to its central bank, foreign exchange reserves decreased by 16.3 per cent to Rs 1,171 billion in mid-March 2022 from Rs 1,399.03 billion in mid-July 2021.

The Nepal government took a total borrowing of Rs 89.50 billion during eight months starting from mid-July 2021 and until last FY, the total public debt was Rs 1.737 trillion, according to the Economic Survey 2021-22. Talking about its internal borrowing, it stood at Rs 863.19 billion while the remaining Rs 984.99 billion was a foreign loan. 

Sri Lankan crisis: 

The island nation Sri Lanka is witnessing the worst economic crisis since its independence from Britain in 1948. The crisis has led to a major shortage of foreign exchange and it is unable to purchase imported goods. Hence, the Lankan public is on the roads and protesting, amid limited availability of food, items, cooking gas, fuel and medicine etc.

The Sri Lankan government has announced that only essential services will operate from midnight till July 10 and all other operations will be temporarily suspended as the crisis-hit nation faces acute fuel shortage, as per news agency PTI. 

Also Read: Sri Lanka’s Aggravating Economic Turmoil | Experts React

Sri Lankan financial downfall started in 2012 when its GDP began to fall, while the Covid-19 pandemic and ban on fertilisers which led to the decrease in grain production acted as fuel to the fire. 

While the Lankan crisis was driven by many reasons, the major cause is linked to China-funded infrastructure projects. These initiatives were high on debt servicing and low on revenue earnings. 

Currently, China is involved in over 50 projects in Sri Lanka, however, the execution is alarming. Experts believe that Chinese economic support for Sri Lanka was never meant only for trade and economic considerations but to gain political and security leverage against India. It is also focused to safeguard its interest in the Indian Ocean where a majority of China’s energy movement takes place.

India: 

In a major setback to Prime Minister Narendra Modi’s central government, the Finance Ministry has said that India’s economy is likely to witness slowing growth, however, higher than the other emerging players.   

Also Read: Decoding Slow Economic Growth And Unemployment

Experts in the past have said that when the economy grows slowly, unemployment rises, but not always. For instance — during 2010-13 the United Kingdom (UK) witnessed a slow rate of economic growth, however, unexpectedly unemployment fell. 

Notably, the Indian economy witnessed a growth of 4.1 per cent in the quarter that ended 31 March. For the entire year, it expanded by 8.7 per cent, slower than the centre's second advance estimate of 8.9 per cent.

According to the data released by the Indian government, retail inflation for farm and rural labourers increased to 6.67 per cent and 7 per cent, respectively in May due to higher prices of certain food items. Talking about wholesale prices, it rose at the fastest pace in at least 17 years. 

Meanwhile, RBI retained the real gross and domestic product (GDP) forecast for the financial year (FY) 2023 at 7.2 per cent.