Terrorist Attacks Rattle Pakistan as China Offers USD 2 Billion Debt Relief
Janhavi Pathak | 13 March 2025
Summary
Militant attacks in Balochistan & Khyber Pakhtunkhwa have become more sophisticated, bolder and coordinated, targeting Chinese assets and deterring project execution under the China-Pakistan Economic Corridor (CPEC).
Regional instability and insecurity will aggravate the investment risk profile of the resource-rich provinces, affecting credit and capital flow. China will likely propose joint protection units to safeguard its high-value assets with stricter business terms to ensure timely delivery as Pakistan struggles with debt financing and defence budget cuts amid IMF bailout conditions.
The Pakistani Army has a realistic possibility to consolidate power in volatile regions to suppress militant groups. Such campaigns may result in human rights violations and civil unrest, impacting incentives for Western partners’ investment.
Situation Overview
Suicide bombings amid an ongoing train hijacking are the latest in separatist attacks in Pakistan’s Balochistan and Khyber Pakhtunkhwa provinces. With their mineral and natural gas reserves, these provinces take up a great proportion of Chinese investment as part of the USD 65 billion (GBP 50 billion) China-Pakistan Economic Corridor (CPEC) under the Belt and Road Initiative (BRI). Porously bordering Afghanistan with limited security, cross-border movement of militants is common, with high rates of poverty and unemployment resulting in deep regional political dissatisfaction and unrest.
Since mid-2024, insurgent groups including Balochistan Liberation Army (BLA), Tehrik-i-Taliban Pakistan (TTP) and Islamic State Khorasan Province (ISIS-K) have executed coordinated suicide bombings, ground assaults and explosive-laden strikes. Civilians account for 60% of terrorism casualties, as attacks become bolder, more frequent, sophisticatedly coordinated and layered. The target profile has shifted from Pakistani Army to Chinese nationals, assets and civilians. According to the ACLED Conflict Index, Pakistan ranked 12th globally in extreme conflict, with 85% saturated in these two regions in 2024.
Instability has hampered the progress and delivery of capital-generating Chinese projects. Pakistan relies heavily on Chinese external financing and bailout programmes amid dwindling foreign reserves. With high outstanding debt payments, Pakistan must repay over USD 22 billion (GBP 17.8 billion) in external debt in 2025. China has often extended deadlines and renewed loans; however, damage to high-value assets compels it to reassess its terms and conditions.
Implications
New attack patterns indicate the increased organisational capacity and tactical capabilities of militants in Balochistan and Khyber Pakhtunkhwa. Access to explosives, weapons and training to carry out more sophisticated attacks suggests a resilient network of resources with intelligence support. The shift in targets towards foreign nationals and indiscriminate killing signals desperation by militants as earlier attacks failed to bring the Pakistani State to the negotiation table. Disruptions to foreign development projects activities relying on foreign labourers and without perceived benefits to local communities are expected, prompting harsher security crackdown, including mass civil detention.
Any political instability and regional insecurity from targeting key supply routes, foreign labourers and vendors will increase the investment risk profile of the region. This may create uncertainty, plunge investors’ confidence, and adversely impact Pakistani markets and credit flow. Capital flight will further affect local businesses amidst a sluggish economy growth rate of 2.5% in 2024. Chinese businesses may hike insurance risk premiums to offset elevated threats and reduce time horizons for limited losses and risk exposure. Operational instability can limit China's ability to provide regular loan relief to Pakistan, which depends on Chinese financing as its largest creditor.
Pakistan will likely enter into joint security arrangements with China, potentially deploying the Chinese Private Security Companies (CPSCs) to fortify defences and control. Mass arrests and human rights violations may arise from harsher crackdowns similar to the clampdown on Pakistan Tehreek-e-Insaf (PTI) protests in 2024. The intensified role of the Pakistani Army in regional politics may further downslide Pakistan in the Democracy Index, impacting its trade prospects with Western countries that prioritise specific democratic values. While militant attacks will likely fray ties with Afghanistan, Iran and India, the Sharif government’s recent efforts to improve ties with Bangladesh and Turkey may attract new investment opportunities, preventing the Pakistani economy from a possible debt default.
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Forecast
Short-term
Militias will likely amplify attacks throughout Balochistan & Khyber Pakhtunkhwa, as Pakistan adopts an aggressive approach, potentially leading to widespread civil unrest and violent clashes. This will reduce the prospects of negotiations for regional stability and security.
Critical supply routes, high-value developmental projects and infrastructure will likely be militarised. While joint on-ground operations with the Chinese forces are unlikely, enhanced partnerships in intelligence & capability-building are expected to rise.
Medium-term
Defence budget will likely witness a marginal rise in FY 25-26 to avoid contravening IMF’s bailout terms. Pakistan will likely restructure & reprofile its external debt with China to get more breathing room in exchange for timely delivery and a safer environment for CPEC projects.
Long-term
Pakistan will likely combine punishments with diplomatic incentives to separatist leaders for a balanced approach, reducing regional risks while ensuring stability and business continuity.
If security concerns mount, China will likely gear back investments and operationalise a joint agreement for on-ground protection by Chinese Private Security Companies (CPSC) for securing high-value investments such as the Gwadar Port and mining operations.
Chinese credit lines will likely entail greater stakes in projects, investment bidding and economic activities to ensure timely returns and avoid debt default, which may lead to asset takeover.
China will likely mediate to resolve disputes and catalyse confidence building measures between Afghanistan and Pakistan to safeguard regional security and joint investments.