Desperate Pakistan Hawks Sovereignty to China For $1.4b Lifeline Amid Domestic Collapse Post-Pahalgam Attack

Islamabad, Pakistan - Pakistan’s economic lifeline is increasingly tied to China under the China-Pakistan Economic Corridor (CPEC) and related agreements. By 2023, Pakistan’s total external debt (including IMF) stood at about $130.8 billion, and China accounted for roughly 22% of that burden (about $28.8 billion). AidData and other studies note that most Chinese funding has come as loans (not grants), often at or near commercial rates. In practice this has strained Islamabad’s finances. 

Pakistan keeps making large dollar repayments on Chinese debt, contributing to persistent current-account deficits. In early 2025 China even agreed to roll over a $2 billion loan to Pakistan, and Pakistan faced roughly $22 billion in external repayments in fiscal 2025 (including ~$13 billion in bilateral debt) according to Fitch. Domestically, officials point out that CPEC projects were negotiated jointly, but critics warn that heavy Chinese debt could ultimately constrain Pakistan’s policy options and sovereignty.

The Hidden Costs of Chinese Lifelines

In late April 2025, Finance Minister Muhammad Aurangzeb confirmed that Islamabad had formally asked Beijing to boost its currency swap facility. Pakistan has an existing 30-billion-yuan (≈$4.3 billion) swap line with China, all of which has already been drawn down. Aurangzeb said Pakistan requested an increase of 10 billion yuan (about $1.4 billion), to raise the limit to 40 billion yuan. This appeal was made during IMF/World Bank meetings in Washington with Chinese Vice Finance Minister Liao Min, just weeks after Prime Minister Li Qiang’s visit resulted in extending debt-repayment terms to 2027. Aurangzeb also noted that Pakistan plans to issue its first “panda bond” (a yuan-denominated sovereign bond in China’s market) before year-end as a way to diversify funding sources.

Meanwhile, Pakistan remains under an IMF programme. Aurangzeb said he expects the IMF board to approve a new $1.3 billion climate-resilience loan and complete the first review of a $7 billion bailout package in early May. That approval would unlock roughly $1 billion in additional aid. In meetings with IMF officials and other lenders, the government has emphasized its ongoing structural reform efforts – such as rightsizing the public sector, overhauling pensions, broadening the tax base, fixing the energy sector and reforming state-owned enterprises – as conditions for sustained assistance. In short, Islamabad is juggling parallel financing lines: emergency cash and loans from China, and programme funding from the IMF, to stabilize its economy in the near term.

Tensions with India Add Strategic Weight to China Ties

Analysts warn that deeper financial ties to China carry significant risks. Heavy Chinese lending may erode Pakistan’s fiscal independence: large portions of the budget and foreign exchange must be devoted to servicing Chinese loans, limiting room for domestic priorities. This has fueled concerns of “debt-trap diplomacy,” where unsustainably high Chinese debt might force strategic concessions if Pakistan struggles to repay. Indeed, much of Pakistan’s Chinese debt has been commercial loans for big projects (power plants, roads, ports), rather than grants, so Islamabad must generate hard currency to meet them. Economist Ammar Khan notes that such borrowing in dollars means Pakistan is “making significant dollar payments for the Chinese debt” and suffering ongoing balance-of-payments stress.

Reliance on China also complicates Pakistan’s IMF engagement. The IMF generally expects debt sustainability, but large bilateral loans from China (often off-market) can inflate debt ratios and raise questions about who bears ultimate responsibility if Pakistan needs relief. Issuing panda bonds in yuan could help meet obligations without using scarce dollars, but it would also expose Pakistan to yuan exchange risk and closer Chinese oversight. Ultimately, critics warn, each new Chinese financial lifeline – swap extensions, yuan bonds, loan rollovers – brings short-term relief but long-term strings attached.

Islamabad Navigating a Tightrope and Failing

The new swap deal comes amid sharply worsened India–Pakistan tensions. On April 22, 2025, a terrorist attack at Pahalgam (in Jammu & Kashmir) killed dozens of tourists. New Delhi accused Pakistan-based militants of involvement and announced a five-point response: India suspended its commitments under the 1960 Indus Waters Treaty, revoked fast-track visas for Pakistanis, expelled Pakistani military advisors, cut its embassy staff by roughly half, and closed the Attari-Wagah land border post to most traffic. The Attari Integrated Check Post – India’s main overland trade route with Pakistan – was shut except for a brief return window for stranded people. In retaliation, Islamabad declared the Indus Treaty suspension “unacceptable” and warned any diversion of water would be an “act of war,” and it sealed its side of Wagah as well. Cross-border trade (already small, about $1.2 billion in 2024) and diplomatic contacts have essentially frozen.

China’s expanding role adds a strategic dimension. Indian commentators note that CPEC runs through Pakistan-administered Kashmir, which India claims as its own, and gives China a direct access route to the Arabian Sea – a geostrategic goal for Beijing. In India’s view, deeper China–Pakistan financial ties heighten the stakes of any conflict. At the same time, Western powers have sided strongly with India on counterterrorism. The U.S., for example, swiftly condemned the Pahalgam attack and pledged “full support” to India. More broadly, many in Washington and Europe watch China’s footprint in South Asia warily: Chinese loans and infrastructure projects in Pakistan are often seen as extending Beijing’s influence at the expense of U.S. and Indian interests. China, however, portrays its role as development-oriented cooperation and rejects accusations of predatory lending.

Pakistan’s new $1.4 billion swap request underscores how deeply it now depends on Beijing for balance-of-payments support. Finance Minister Aurangzeb emphasizes that these are routine, mutually agreed arrangements to help stabilize the economy. Yet the reliance on Chinese funding – from currency swaps and loans to prospective panda bonds – inevitably carries political and economic strings. Islamabad must tread carefully: meeting IMF reform conditions will be harder if debt service to China balloons, and each concession to Beijing can affect Pakistan’s sovereignty over its policies.

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