This piece is part of the series “All About China”—a journey into the history and diverse culture of China through short articles that shed light on the lasting imprint of China’s past encounters with the Islamic world as well as an exploration of the increasingly vibrant and complex dynamics of contemporary Sino-Middle Eastern relations. Read more ...
Pakistan and Egypt are pivotal states in volatile regions. For this reason, the world’s major powers and multilateral financial institutions essentially regard them as ‘too big to fail.’ But the short-term outlook for both economies is grim. Pakistan’s economic situation is precarious. The country is reeling under inflationary pressure and a shortage of even basic goods. Meanwhile, although Egypt’s post-pandemic economic recovery had gained momentum during FY2021/22, imbalances started building amid a stabilized exchange rate. Russia’s war on Ukraine crystallized pre-existing pressures.
Islamabad and Cairo have their hopes pinned on securing IMF support and short-term refinancing and rollovers from friendly countries, notably the Gulf States. However, these traditional benefactors have come to recognize that this band aid approach is unsustainable even as they find themselves again compelled to throw Pakistan and Egypt a lifeline. At the same time, though, they seem more strongly resolved than in previous crises to perform a ‘rescue with a purpose.’
How Pakistan and Egypt manage their current crises, and whether their leaders can muster the political will to shift decisively from seeking a respite to enacting meaningful reforms are matters of some importance to China. For, as China’s capabilities and ambitions have grown, so too have its economic stakes in both Pakistan and Egypt, and in their surrounding regions.
China’s Economic Stakes in Pakistan and Egypt
Historically, Beijing has accorded much greater strategic importance to its relations with Pakistan than Egypt. This has been reflected in their pattern of relations, where China’s defense partnership with Pakistan long predates and is far more extensive than any component of its nascent security cooperation with Egypt. Yet, as China’s capabilities and ambitions have grown, so too has its relations with both these countries. Propelled by the Belt and Road Initiative (BRI), China’s economic engagement with them has deepened. While the China-Pakistan Economic Corridor (CPEC) is the BRI’s flagship project, Egypt has emerged as the linchpin of China’s efforts under the BRI to expand access for its goods into European and African markets.
China and Pakistan have had strong defense and diplomatic relations for decades. Bilateral economic ties, though slow to develop, accelerated following the signing in November 2006 of a Free Trade Agreement (FTA). For the past seven years, China has been Pakistan’s top trading partner. But it was the launching in 2015 of CPEC — a mammoth infrastructure and connectivity project — that provided the impetus for the growth of China’s presence in and importance to Pakistan’s economy.
Chinese state-owned enterprises (SOEs) such as Machinery Engineering Corporation (CMEC), PowerChina, China Three Gorges Corp., and China Overseas Ports Holding Company (COPHC) have figured prominently in the development of CPEC. The bulk of the economic corridor’s investment to date has been concentrated in energy projects, with Chinese investment flowing to address infrastructure bottlenecks, especially in power generation; and Chinese participation in CPEC projects are beneficiaries of financing from Chinese policy banks, notably the China Development Bank (CDB) and the Export-Import Bank of China (CHEXIM). Within less than a decade, China has emerged as Pakistan’s largest creditor as well as its largest source of foreign direct investment.
Although, unlike Pakistan, Egypt is geographically far removed from China and the latter’s immediate neighborhood, it has become an important strategic element of the BRI. China is the biggest user of the Suez Canal and the largest investor in the Suez Canal Economic Zone — a crucial link for 60% of the goods it ships to Europe. China’s implementation of commercial projects in Egypt reflects a growing interest in increasing its presence and activities in and around the Red Sea corridor and southern Mediterranean.
China’s economic footprint in Egypt, as in the case of Pakistan, has greatly expanded since the inception of the BRI. More than 1,500 Chinese companies are registered in Egypt, more than 140 of which have made investments. Similar to Pakistan, these firms include some of the largest and most experienced Chinese SOEs, such as CITIC Group, China State Construction Engineering Company (CSCEC), China Railway Group, Hutchison Ports, China State Shipbuilding, PowerChina, Sinoma Engineering, Sinopec, and China State Construction & Engineering Company (CSCEC). Major publicly traded companies also are engaged in Egypt, notably China Jushi, the world’s largest producer of fiberglass. In addition, the China-Egypt TEDA Suez Economic and Trade Cooperation Zone — modelled on one of China’s largest and longest-running manufacturing and logistics hubs — has served as a platform for Chinese enterprises to “go global.” There, China-Egypt joint venture partners produce a wide range of goods aimed at meeting local demand and tapping into African and European markets, buoyed by credit facilities arranged by China Eximbank.
As China’s economic involvement in Pakistan and Egypt has increased, so has its stake in their economic and political stability. At the present time, however, both countries are facing economic crises.
Pakistan’s economy has been in a downward spiral for months. Last year’s catastrophic floods inundated a third of the country, severely damaging agricultural production, which accounts for 23% of GDP and 37% of employment. Political instability and a resurgence of violence have compounded Pakistan’s woes, though the World Bank has attributed the stunting of economic progress primarily to distortions, either introduced or unaddressed by policy decisions.
Last year, the Pakistan rupee plunged nearly 30% compared to the US dollar, becoming one of the worst-performing currencies in Asia. The depreciated currency made imports costlier, leading to a further contraction of foreign exchange (forex) reserves. In fact, the country’s forex fell to $4.3bn in January, its lowest level since February 2014 — enough to cover only one month’s imports. Meanwhile, Pakistan’s national debt has ballooned to $274 billion, or nearly 90% of GDP. Pakistan’s foreign debt and liabilities now stand at $100bn, and the country is scheduled to repay more than $26 billion this fiscal year. The energy sector alone is so heavily indebted that it cannot afford to invest in the infrastructure needed to meet demand.
Skyrocketing prices, which are fueling inflation, are leading to a substantial increase in poverty. These dire conditions led Pakistan in December to suspend the import of non-essential goods, which in turn forced factory shutdowns and substantial job losses in the country’s large textile industry, with the trading and services sectors also feeling the pinch. Compounding Pakistan’s problems, a power blackout struck all major cities in mid-January, leaving millions of people without electricity.
Egypt’s current economic situation is little better than that of Pakistan. After initially recovering from the coronavirus pandemic, Egypt’s economy has been hit hard by the fallout from the war in Ukraine. However, the roots of Egypt’s economic distress lie much deeper and closer to home. Most observers attribute Egypt’s current travails to the government’s investment choices; to the decision to relay extensively on external borrowing to finance mega infrastructure projects; to the continued military domination of major chunks of the economy; and to the anemic state of the private sector.
In some respects, Egypt’s economy is back to where it was in 2016, when the government secured a three-year $12 billion loan to support its reform plan. Over the past year, the Egyptian pound has lost 44% of its value against the US dollar in the past year. Inflation climbed to 21.3% in December, its highest rate in five years. Skyrocketing food prices and surging costs for medical services, and housing have depleted many Egyptians’ savings. A weak economy and a depreciating currency have led investors to pull out of Egyptian assets.
Between Respite and Reform
With reserves dwindling, both countries urgently need external financing to support their struggling economies. International lenders and governments pledged $9 billion in flood recovery for Pakistan at a donor conference in Geneva in early January. However, a revived IMF program with Pakistan has been pending since September, in turn delaying approval of World Bank and Asian Infrastructure Investment Bank (AIIB) loans. On this occasion, unlike the previous 22 times since 1959 that Pakistan has sought its support, the IMF appears to have been less willing to make concessions. Just months away from general elections though with the economy sharply deteriorating, in late January Pakistan’s coalition government found itself pressed into taking the unpopular decisions needed to secure the release of the latest tranche of IMF financing.
Like Pakistan, Egypt turned to the IMF — for the fourth time since 2016 — to help rescue its embattled economy. Last December, the IMF’s Executive Board approved a $3 billion loan under the Extended Fund Facility (EFF) to provide some relief and catalyze additional financing from abroad. Under the EFF arrangement, Egypt agreed to implement a policy package that includes a permanent shift to a flexible exchange rate, the expansion of the social safety net to alleviate poverty and protect the vulnerable. The package also includes reforms to facilitate private-sector-led growth and job creation through the gradual withdrawal of the state from “non-strategic sectors” and the curbing of the military’s outsized role in the economy; and the tightening of fiscal discipline by slowing the implementation of public investment projects.
As both Pakistan and Egypt swallow the bitter pill of “stringent” conditions needed to reenter the IMF loan program, they are also facing closer scrutiny from some of their traditional patrons, namely the Gulf Arab countries. Saudi Arabia and the United Arab Emirates (UAE) in particular, which have extended support on multiple occasions, have not abandoned Pakistan this time. Last August, for example, Riyadh renewed its $3 billion deposit with State Bank of Pakistan and is reportedly conducting a study on increasing the deposit to $5 billion. During a visit to UAE in January, Prime Minister Shehbaz Sharif reportedly obtained a $2 billion loan rollover and an additional loan of $1 billion.
Since at least last August, Pakistani officials have been actively seeking investment from Muslim-majority countries. Similarly, Egypt aims to bridge its financing gap through FY2025/26 mainly by selling state-owned assets, including to member states of the Gulf Cooperation Council (GCC). Qatar, Saudi Arabia, and UAE have all reportedly been considering plans to increase investments in Pakistan across various sectors. Last October, for example, the Abu Dhabi Holding Company (ADQ) is said to have pledged to substantially boost Emirati investment in Egypt. At about the same time, the Qatar Investment Authority (QIA) held advanced talks to purchase state-held stakes in Egypt’s mobile phone network and invest in other companies. Thus far, however, very little investment appears to have materialized.
These recent responses to Pakistan and Egypt’s economic distress are noteworthy, for several reasons. First, they indicate an apparent toughening of the IMF teams’ negotiating stances. Second, they suggest some reluctance on the part of Gulf Arab countries to throw a lifeline to Pakistan and Egypt without seeing clearer evidence that reforms are forthcoming, which possibly signifies a closer alignment of their policies with those of multilateral financial institutions. Third, they could foreshadow a rebalancing by Saudi Arabia and perhaps other Gulf States, away from simply furnishing unconditional grants and deposits towards investment, not just to assist regional states facing economic distress but to generate financial returns while deepening their political influence.
China: When Debt is the Price of Development
Entering 2023, at least 30 developing countries face overlapping crises. Pakistan and Egypt are among them. Whether, when, and how Pakistan and Egypt manage to overcome the challenges they each face is more than of passing interest to China, whose economic stakes in both countries have grown appreciably over the past decade.
Like a slew of other developing countries that are experiencing financial distress, Pakistan and Egypt are heavily indebted to Chinese lenders. About 30% of Pakistan’s foreign debt is owed to China, including state-owned commercial banks. China is Egypt’s fourth largest creditor, with outstanding debts amounting to nearly $8 billion — a modest figure when compared to the amount owed by Pakistan, though far from insignificant. Yet, readers who expect this discussion to reprise the China “debt-trap diplomacy” narrative, or to debunk it, will be disappointed.
It may come as no surprise to readers to learn that China is the world’s largest bilateral lender and one of low- and middle-income countries’ largest creditors. Perhaps less widely recognized, however, is that China has seen its own exposure to distressed debtors markedly increase. This has resulted in something of a shift in China’s role from loan provider to debt collector and to China’s emergence as a major player in sovereign debt renegotiations. In fact, the Financial Times reported last July that these renegotiations surged in 2020 and 2021 to $52 billion — more than three times that of previous years.
These circumstances have also led China to pivot, as the cases of Pakistan and Egypt illustrate, from project lending, which has been on a downward trajectory for several years, to balance of payments support aimed at enabling valued partners to repay project debts and weather the storm. Pakistan is not only the most highly indebted to China of its BRI partners, but, along with Sri Lanka and Argentina, among the largest recipients of Chinese rescue lending. Last June, for example, a consortium of Chinese state banks lent $2.3bn to Pakistan to help the country avert a foreign payments crisis. In November, shortly after the IMF announced it would grant Egypt a short-term loan to finance its budget, China Development Bank provided a $2 billion loan to shore up the country’s foreign exchange reserves. Egypt is also aiming to obtain $500 million in Chinese yuan-dominated Panda Bonds, and seeking cheap financing elsewhere to help plug the gap in its finances.
To date, China’s approach to handling debt distress has been to reschedule loans, instead of writing them down; to provide emergency loans without pressing borrowers to restore economic policy discipline; and to follow an independent path, rather than coordinate with other creditors and with the IMF. Yet, there are some signs that this could change. It is interesting to note, for example, that Chinese officials reportedly urged Islamabad to repair ties with the IMF — if true, an indication that Beijing regards resumption of the Fund’s lending program as key to mitigating Pakistan’s risk of default.
It is also revealing that Pakistan seems keener to take on new financing from China than China may be to furnish it. Even as the economy wobbles under a heavy debt burden and other acute challenges, Pakistani officials have sought support from China to upgrade the Main Line 1 (ML-1) railroad, a project which, if not undertaken, they claim could result in the breakdown of the entire railway system. Yet, the IMF wants Pakistan to rein in CPEC activity. And China’s own domestic economic challenges and priorities might make it hesitant to respond to Islamabad’s appeals. On the other hand, the ML-1 project might meet Beijing’s more exacting standards for and increasing emphasis on “high quality” BRI infrastructure projects.
Meanwhile, Egypt, unlike Pakistan, has already reached a deal with the IMF, one which appears to have enabled the country to stave off default. The agreement contains tougher performance requirements than under previous such deals and sets specific targets and test dates. Yet, at the same time, it also signals confidence in Egypt’s growth potential, provided the government stays on track. These developments raise interesting questions regarding the status of existing Chinese projects in Egypt and whether China is prepared to issue new project loans.
Chinese official media, reporting on Foreign Minister Qin Gang’s January visit to Cairo, quoted him as saying Beijing is prepared to “accelerate the promotion of major cooperation projects,” which seems directly at odds with the IMF’s stipulation that Cairo slow down public investments. Still, the terms of the IMF deal could present China with opportunities, not just dilemmas. Cairo is poised to release a plan to sell some state-owned assets to private investors and list government-owned companies on the Egyptian Exchange (EGX), with an unspecified number of other important companies to be sold later. It will be interesting to watch whether Chinese investors will join Saudi and Emirati counterparts, in seeking to acquire stakes in Egyptian public enterprises, and if so in which sectors.
Both Pakistan and Egypt are grappling with a balance-of-payments crisis and rampant price increases. External factors have exacerbated these problems. The global economic slowdown has weighed on demand for their exports. The strength of the US dollar has strained their capacity to pay for essential imports. The war in Ukraine has disrupted supply-chains, driving up food and fuel prices. With depleted stores of dollars and an exodus of foreign investment, both nations — struggling to meet their debt obligations, as are many other emerging markets and developing economies — have turned to the IMF to secure bailouts.
Egypt’s deal with the Fund was agreed in December and published in January. Talks Pakistan and IMF officials are currently underway to complete the ninth review under the $7 billion Extended Fund Facility. Egypt’s economy will likely stay afloat with the help of the bailout; Pakistan’s economy will sink without it. In both cases, the IMF has set tougher terms for these latest bailouts. But it remains to be seen whether these new deals will prove any more successful than previous ones in giving renewed impetus to the reform agendas, whether those agendas will be faithfully implemented, and if so whether they drive growth — especially under mounting debt repayment obligations.
China has not driven these two countries into crisis by forcing unsustainable infrastructure projects upon them. To be sure, Chinese financing has fueled the megaprojects they have undertaken. However, some of those same projects fulfill real development needs. Moreover, their design and execution has largely been driven by recipient governments and state-owned enterprises (SOEs). But regardless of the level of culpability for Pakistan and Egypt’s financial woes that can be justifiably attributed to Beijing’s lending practices, one thing is clear: increased economic involvement in Pakistan and Egypt has heightened China’s risk exposure, materially and reputationally.
Indeed, for China, Pakistan and Egypt are distressed assets — BRI partners too important to ignore with economies too big to allow to fail. Stabilizing their economies depends on resolving debt problems that can only realistically be achieved through strengthened multilateral cooperation. Longer-term economic progress ultimately depends on Cairo and Islamabad addressing deeply rooted structural problems. It would seem to be in China’s self-interest to join forces with other major powers and international financial institutions to help assure both these outcomes.
 For a discussion of Chinese and Pakistani motivations for launching CPEC, see Siegfried O. Wolf, The China-Pakistan Economic Corridor of the Belt and Road Initiative (Switzerland: Springer Nature, 2020): 47-71 and 73-91.
 Muhammad Tayyab Safdar, “The Local Roots of Chinese Engagement in Pakistan,” Carnegie Endowment for International Peace, June 2, 2021, https://carnegieendowment.org/2021/06/02/local-roots-of-chinese-engagement-in-pakistan-pub-84668
 Martina Fuchs, “Bilatral trade to reach new heights, says Pakistan’s FM,” Xinhua, January 21, 2023, https://english.news.cn/20230121/405a1886620f4f7996443a8dc6ed00bf/c.html
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 John Calabrese, “Towering Ambitions: Egypt and China Building for the Future,” Middle East Institute, October 6, 2020, https://www.mei.edu/publications/towering-ambitions-egypt-and-china-building-future; and Calabrese, “Economics Driving China’s Interest in Egypt,” Near East Policy Forum, October 5, 2021, https://nepf.org.au/index.php/economics-driving-chinas-interest-in-egypt/
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 TEDA, whose full name is Tianjin Economic-Technological Area, is a Chinese regional development model established in 1984 as one of the first batch of 14 provincial-level development zones approved by China’s State Council. See: “Tianjin Economic-Technological Development Area (TEDA),” China Daily, February 17, 2022, http://subsites.chinadaily.com.cn/tianjin/binhain/2022-02/17/c_382557.htm; and Ye Chao et al., “A comparison and case analysis between domestic and overseas industrial parks of China since the Belt and Road Initiative,” J. Geogr. Sci. 30, 8 (2020): 1266-1282.
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 Mirette Magdy, “Qatar in Talks to Invest $2.5 Billion in Egypt as Ties Mend,” Bloomberg, October 19, 2022, https://www.bloomberg.com/news/articles/2022-10-19/qatar-in-talks-to-invest-2-5-billion-in-egypt-to-expand-support; and Fatma Salah, “Qatar Authority studying a green hydrogen project in Egypt with investments exceeding $1bln,” Zawya, November 1, 2022, https://www.zawya.com/en/business/energy/qatar-authority-studying-a-green-hydrogen-project-in-egypt-with-investments-exceeding-1bln-wxez770w
 Mirette Magdy, “Egypt Needs ‘Critical’ Gulf Deals to Cover Funding Gap, IMF Says,” Bloomberg, January 10, 2023, https://www.bloomberg.com/news/articles/2023-01-10/egypt-needs-critical-gulf-deals-to-cover-funding-gap-imf-says
 Saudi Finance Minister , quoted in Stephen Kain, “Saudi Arabia Wants to Export Its Economic Reforms, Finance Minister Says,” Wall Street Journal, January 18, 2023, https://www.wsj.com/livecoverage/davos2023/card/saudi-arabia-wants-to-export-its-economic-reforms-finance-minister-says-CVA7vCq62l4M7IMCTRGb; and Abeer Abu Omar, “Saudi Arabia Says Days of Unconditional Foreign Aid Are Now Over,” Yahoo, January 18, 2023, https://finance.yahoo.com/news/saudi-arabia-says-days-unconditional-103818071.html
 Homi Kharas and Charlotte Rivard, “Debt, Creditworthiness, and Climate,” Brookings Institution, Working Paper No. 180 (December 2022), https://www.brookings.edu/wp-content/uploads/2022/12/Debt-creditworthiness-and-climate-1.pdf.
 Faseeh Mangi, “Saudi Arabia Eyes Boosting Investment in Pakistan to Over $10 Billion,” Bloomberg, January 10, 2023, https://www.bloomberg.com/news/articles/2023-01-10/saudi-eyes-boosting-investment-in-pakistan-to-over-10-billion
 Rehaam al-Saadany, “Egypt prepares to obtain $500 mn in financing from China as it seeks to close funding gap,” Mada (Cairo), December 12, 2022, https://www.madamasr.com/en/2022/12/12/news/u/egypt-prepares-to-obtain-500-mn-in-financing-china/
 World Bank, International Debt Statistics 2022 (2022): 8-9, https://openknowledge.worldbank.org/bitstream/handle/10986/36289/9781464818004.pdf
 Sebastian Horn, Carmen M. Reinhart, and Christoph Trebesch, “China’s Overseas Lending and the Ukraine War,” Centre for Economic Policy Research, April 11, 2022, https://cepr.org/voxeu/columns/chinas-overseas-lending-and-war-ukraine
 James Kynge, Kathrin Hille, Benjamin Parkin, and Jonathan Wheatley, “China reckons with its first overseas debt crisis,” Financial Times, July 21, 2022, https://www.ft.com/content/ccbe2b80-0c3e-4d58-a182-8728b443df9a
 See China’s Overseas Development Finance Database, Boston University Global Development Policy Center (GDPC), https://www.bu.edu/gdp/chinas-overseas-development-finance/
 Tom Hancock, “China’s $26 Billion Pivot From Infrastructure to Emergency Loans,” Bloomberg, August 3, 2022, https://www.bloomberg.com/news/articles/2022-08-03/china-s-26-billion-pivot-from-infrastructure-to-emergency-loans
 James Kynge and Jonathan Wheatley, “China emerges as IMF competitor with emergency loans to at-risk nations,” Financial Times, September 11, 2022, https://www.ft.com/content/f27a543b-7678-4130-9c05-db0492d9c240
 Farhan Bokhari, “Chinese banks lend Pakistan $2.3bn to avert foreign exchange crisis,” Financial Times, June 24, 2022, https://www.ft.com/content/6250c214-cfdc-4b4f-85b3-876666d01ff4
 Muhammed Magdy, “China, Egypt establish civil body to promote mutual investments,” AL-Monitor, December 9, 2022, https://www.al-monitor.com/originals/2022/12/china-egypt-establish-civil-body-promote-mutual-investments#ixzz7s5N00iPt; and Mirette Magdy, “Egypt Talks China, Japan Loans; IMF Deal Needs Month or Two,” Bloomberg, September 22, 2022, https://www.bloomberg.com/news/articles/2022-09-22/egypt-explores-china-japan-loans-imf-deal-needs-month-or-two
 Farhan Bokhari, “Chinese banks lend Pakistan $2.3bn to avert foreign exchange crisis,” Financial Times, June 24, 2022, https://www.ft.com/content/6250c214-cfdc-4b4f-85b3-876666d01ff4
 Farhan Bokhari and Benjamin Parkin, “Pakistan taps Chinese credit for railway upgrade despite debt crisis,” Financial Times, January 3, 2023, https://www.ft.com/content/44c26d5c-97d2-4181-b5a4-9ef66ce776db
 Maryam Suleman Anees, “Why China Could Tighten its Purse Strings on CPEC Projects,” The Diplomat, October 31, 2022, https://thediplomat.com/2022/10/why-china-could-tighten-its-purse-strings-on-cpec-projects/
 Jacob Mardell, “The Belt and Road: Bigger than Infrastructure,” China Observers, March 2, 2022, https://chinaobservers.eu/the-belt-and-road-bigger-than-infrastructure/
 See briefing by Ivanna Vladkova Hollar, IMF Assistant Director and Mission Chief for Egypt, Middle East and Central Asia Department, in “Transcript of Press Conference on the IMF Program for Egypt,” IMF Press Center, January 10, 2023, https://www.imf.org/en/News/Articles/2023/01/10/tr011023-transcript-of-egypt-press-briefing
 “China to synergize development strategies, speed up cooperation projects with Egypt,” CGTN, January 16, 2023, https://news.cgtn.com/news/2023-01-16/China-to-accelerate-cooperation-projects-with-Egypt-1gDzNUubFxm/index.html
 Eduard Cousin, “As economic crisis deepens, will Egypt slow megaprojects down?” Aljazeera, January 18, 2023, https://www.aljazeera.com/news/2023/1/18/as-economic-crisis-deepens-will-egypt-slow-megaprojects-down
 IMF, World Economic Outlook 2023: Inflation Peaking amid Low Growth (January 2023): 9, https://www.imf.org/-/media/Files/Publications/WEO/2023/Update/January/English/text.ashx
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