News Analysis |
The United States early on Friday said that the huge Chinese debt was responsible for the economic challenges in Pakistan, adding that it will review government’s bailout plea to the IMF from all angles, including the country’s debt position.
During a press conference, the State Department spokesperson Heather Nauert said; “We understand that Pakistan has formally requested assistance from the International Monetary Fund (IMF). In all cases, we examine that closely from all angles of it, including Pakistan’s debt position, in evaluating any type of loan programme,” adding this is something the United States has been tracking fairly closely.
Pakistan has formally asked the International Monetary Fund for assistance in its burgeoning debt crisis, the UK’s financial times revealed on the 10th of October, Thursday. It may be one of the largest bail-out packages in the country’s history. The Pakistan Tehrik-i-Insaf has got considerable flak for approaching the IMF, despite strong election campaign promises to the contrary.
This has given ample ammunition to the opposition who maintain the PTI seems unable to govern or make sound policy decisions. Political rhetoric aside, experts argue that the move to request a loan from the International Monetary Fund is the right one to make and perhaps it should have been made sooner. Uncertainty in Pakistani markets about the steps the government was going to take to resolve the debt crisis resulted in the plunging of the Pakistan Stock Exchange.
In return, the IMF team will get a close look at the state of the country’s finances and in particular, debts to be paid to China under the China Pakistan Economic Corridor.
A recovery has been made to some extent, now that it’s clearer what policy the government is likely to adopt. The Tehrik-i-Insaf did try to avoid the IMF option, probably both for political reasons and as a way out of the debt trap. Crowd-funding the Diamer-Bhasha dam was an indication of the thought process prevailing in Islamabad.
Asking overseas Pakistanis to buy government debt in the form of bonds also appeared to be an option. But the slow rate at which donations poured in for the dam showed neither of these options was likely to take Pakistan out of debt. Hydroelectric dams tend to be multi-billion dollar projects and often exceed the estimated cost of construction. Then, the government tried asking its ‘friends’ for help.
Read more: Will PTI be forced to embrace IMF?
The Prime Minister went to Saudi Arabia and then the Emirates in his first visit abroad. The finances minister and the advisor for commerce accompanied him. The Saudis were asked to invest in Pakistan and become a part of CPEC, in addition to delayed payments by Islamabad for crude oil imports from Riyadh. Simultaneously, the Chief of Army Staff Lt. General Qamar Javed Bajwa paid a visit to China.
Observers noted that the timing of both visits showed they might have been made to achieve a common purpose. Although Saudi Arabia was willing to invest in Pakistan-a 11,0 00 barrels per day production capacity oil refinery in Gwadar is in the works in addition to exploration and mining of gold and copper reserves in Baluchistan-it did not agree to become part of CPEC.
Christine Lagarde also said ‘we need to have a complete understanding and absolute transparency about the nature, size, and terms of the debt that is bearing on a particular country.’
Finally, there was no other option but to go to the IMF. Christine Lagarde, managing director of the fund said in a statement, “An IMF team will visit Islamabad in the coming weeks to initiate discussions for a possible IMF-supported economic program. We look forward to our continuing partnership.”
Lagarde also said that she had met with Pakistan’s minister of finance Asad Umar, the governor of the State Bank of Pakistan Tariq Bajwa and members of their economic team. An IMF team will visit Pakistan in the coming weeks for talks to finalize details of the bail-out package. What can we expect from these talks?
Read more: Pakistan forced to return to IMF!
An estimated $6 to $8 billion will probably be requested by Pakistan. In return, the IMF team will get a close look at the state of the country’s finances and in particular, debts to be paid to China under the China Pakistan Economic Corridor. They will likely demand spending cuts on public welfare that might hurt the PTI’s domestic standing.
Loan packages from the international monetary fund always come with strings attached. This will be the 13th bail-out package granted to Pakistan by the IMF since 1988. The last time the country went to the IMF was in 2013 and got nearly $6.7 billion in loans. Representatives from the IMF and officials in Washington have been critical of the China Pakistan Economic Corridor in particular and the One Belt One Road initiative in general.
Cuts in welfare spending might hurt the poor and vulnerable would give opposition parties yet more ammunition to attack the PTI.
They claim Beijing is saddling countries with weak economies with amounts of debts they cannot possibly repay. One example is that of Sri Lanka, where China was able to convert debt into equity and secure a 99-year lease on the Hambantota port. Pakistan also canceled the funding of the Diamer Bhasha dam under CPEC because the terms of finance were not favorable.
More recently, a $2 billion revamp project of a major railroad was also canceled under CPEC due to debt concerns. It won’t be surprising if the IMF demands a further rollback of projects under CPEC. Mike Pompeo said that having the IMF give a loan to Pakistan does not mean it can be used to pay back Chinese loans. Christine Lagarde also said ‘we need to have a complete understanding and absolute transparency about the nature, size, and terms of the debt that is bearing on a particular country.’
Read more: Pakistan With or Without the IMF?
This may be an implicit reference to Chinese investment in Pakistan. In the larger geostrategic and geo-economic competition between China and the US, the IMF may be a tool that allows the US to roll back Chinese investments in debt-ridden Pakistan. However, the economic corridor is seen as a lifeline for future prosperity in Islamabad. A number of projects have already been completed and others are in the pipeline.
It is highly unlikely that the government of Pakistan would consider a major rollback of CPEC, although that’s what the IMF might want to make sure of when it attaches strings to the loan it provides. Decision-makers will probably have to make some tough choices. Alienating China by forgoing CPEC is not an option.
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Cuts in welfare spending might hurt the poor and vulnerable would give opposition parties yet more ammunition to attack the PTI. And merely taking on more debt and muddling through a 5-year tenure without substantial improvement in the country’s economy will hurt the Tehrik-i-Insaf’s chances in the next general elections, especially given their grandiose pre-election rhetoric.