IMF bailout may put Pakistan-China relations under slight strain

IMF bailout may put Pakistan-China relations under slight strain











By P.K.Balachandran/Daily Mirror

US Secretary of State Mike Pompeo’s remark that an IMF bailout package to Pakistan should not be used by the latter to pay off its debt to China, is partly meant to put a strain on Islamabad’s relations with Beijing. The unstated aim is to pull the new Imran Khan government in Pakistan away from China and towards the US and the West.

Pakistan relies heavily on China for building much needed infrastructure and for strategically checkmating its neighbor India.

Writing in the website of the Centre for Strategic and International Studies, Mark Sobel, a former representative of the US in the IMF said: “While the China-Pakistan Economic Corridor (CPEC) holds forth the prospect of boosting the Pakistani economy, especially if investments are sound, the terms and conditions of much of the lending are opaque, and interest rates on some loans may be higher than Pakistan can afford. The IMF must ensure that its resources are not used to bail out unsustainable Chinese lending for CPEC.”

In the last 13 months or so, Pakistan has sought over US$ 6.2 billion in Chinese loans.

“The Fund (IMF) needs to have at its fingertips comprehensive data on all CPEC lending – its terms, maturities and parties involved. Chinese lending should be on realistic terms and consistent with Pakistan’s sustainability. Otherwise, China should reschedule or write down its loans, sharply reducing the value of its claims,” Sobel wrote.

The IMF’s team, which will be starting talks with Pakistan on November 7 on the latter’s plea for a US$ 6.2 billion bailout, is expected to insist that Islamabad re-work its debt to Beijing.

But Pakistan’s heavy reliance on China makes it hard for it to ask Beijing to reschedule or rework its debt repayments, though, eventually, as an “all weather friend”, China might oblige, though only if a particular condition is met.

Mike Pompeo,former CIA chief, now US Secretary of State

Just as Pakistan cannot do without China, China cannot do without Pakistan. China has a huge financial commitment in Pakistan in the form of the multi-billion dollar CPEC. CPEC also has very significant strategic connotations for China. China has said that it supports the International Monetary Fund (IMF) in carrying out an “objective and professional evaluation” of Pakistan’s financial situation, but the bailout measures should not affect normal bilateral cooperation between China and Pakistan.

“As a member of the IMF, China supports this organisation in carrying out objective evaluation of Pakistan’s financial difficulties and assisting it in dealing with current difficulties and the relevant measures shall not affect the normal bilateral relations between the two countries,” Chinese Foreign Ministry’s spokesperson Lu Kang said during his regular press briefing on Monday.

US Seeks Support of All Pakistan Parties

After stating the usual stringent conditions of the IMF such as cutting down budget deficits and pruning subsidies, former US Representative on the IMF  Mark Sobel went on to ask the IMF to seek the support of the opposition parties in Pakistan so that any successor government will abide by the terms and conditions of the IMF package.

This puts Prime Minister Imran Khan in a tight political spot. He will have to talk to his antagonistic rivals in the Pakistan Muslim League (Nawaz)  and the Pakistan Peoples’ Party (PPP), so soon after the parliamentary elections which had been exceptionally rancorous.

However, seeking and getting the consent of the opposition for the sake of the IMF is not new to Pakistan. In 1994, an interim government led by Moeen Qureshi, had submitted written affidavits of support from the then top leaders, Nawaz Sharif and Benazir Bhutto.

Differences in Perception

The first hurdle to be overcome in the talks between the IMF and Pakistan is the difference in perception about the nature of Chinese loans.

Pakistan’s Finance Minister Asad Umar told the media after his talks with IMF’s Christine Lagarde in Indonesia, that the State Department’ contention is “100% wrong.”

“Pakistan’s financing gap for the current year is about US$ 12 billion and total repayments to China averages US$ 300 million over the next three years,” Umar said.

“The terms should be placed before parliament and shared with the IMF. We should show how a real friend China extended attractive financing to Pakistan for the long term. The Chinese embassy has endorsed this position in a recent tweet,” Umar added. According to the Chinese , CPEC has already produced 70,000 jobs for locals.

Asad Umar, Pakistan Finance Minister

Former Finance Minister Miftah Ismail told Reuters that the “weighted average interest rate” of Chinese loans is only 2%. “These are not loans that will break our back,” he said.

As per Finance Ministry calculations for the next five years, Pakistan’s total annual debt repayments and profit expatriation by Chinese companies would be below $1 billion, Ismail added. But Dawn writer Kurram Hussain asks, “How come the Planning Commission put out a figure closer to US$ 3billion  year or so ago?

As per the IMF’s post-program monitoring report, Pakistan’s external debt service requirements would leap to US$ 45 billion next year.

Finance Minister Umar denied a statement by his Information Minister Fawad Chaudhry that unacceptable conditions from friends – Saudi Arabia, China and the UAE – had compelled Pakistan to go for the IMF bailout.

“The IMF bailout program was taken with their consultation and there was no condition demanded either by Saudi Arabia, the UAE or China at all,” Umar said.

Pakistan has to go for an IMF bailout because of certain domestic and external factors, the Minister said. Foreign exchange reserves dwindled because of the yawning gap between imports (US$ 60 billion) and exports (US$ 25 billion). And the relevant external factors were the US sanctions on Iran and the trade war with China. This led to an oil price increase and economic uncertainty in the international market. An increase in US interest rates also created unfavorable conditions in the external sector.

However, according to Prof. Rashid Amjad of the Lahore School of Economics,  a question that should be asked is why 18 IMF programs in the last 30 years, have ended up with an unsustainable fiscal and current account deficit and a run on the country’s foreign exchange reserves.

The blame can be put at the door of the IMF as well as successive Pakistani governments. The IMF’s policies have been politically inconvenient. And there has been continuous economic mismanagement also.

Writing in Dawn, Prof.Amjad has suggested that the government draw up a “credible and consistent homegrown economic roadmap, a strategic three-year plan covering the coming years from 2018 to 2021.”

“On the stabilization front, this plan should target a staggered decline in the fiscal deficit from the current expected 7.2 % cent in 2018-19 (excluding measures in the revised budget) to near 5%  over the next three years, supported by steps to gradually reduce subsidies, including in the energy sector, and new initiatives to increase tax revenues.”

Lu Kang, Chinese Foreign Ministry spokesman

“ We must never forget the terrible impact of a sudden steep decline in the fiscal deficit agreed on with the IMF in the 2008 programme, which led to a collapse in the growth rate from 5.5%  to around 0.7% (and a cut in subsidies, which resulted in food inflation of over 25%). The economy never quite recovered from this,” Prof.Amjad pointed out.

“Most importantly, the strategic plan should be supplemented with the outline of a medium-term development plan that serves as a framework for cuts in development expenditure, projects shelved or reduced, and funds reallocated, including those under CPEC.”

Other countries like Malaysia have cut expensive and non-priority Chinese- funded projects drastically.

“In our negotiations with the IMF, the government it would be sensible to agree to a 24-36 months, US$ 8-9 billion fund program, frontloaded with the release of a sufficiently large initial tranche to calm the markets and restore business confidence,” Amjad further said.

Finance Minister Umar has said that government will see that the IMF conditions do not impact on the poor harshly. He pointed out that fuel prices have been differentiated so as not to hit the poor hard. Electricity prices would also be similarly differentiated.

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