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Pakistan, IMF and China: Between debt uncertainty and geopolitical interests

  Ankit Singh

On 27 July, Pakistan’s finance minister shared on his social media page that China’s Exim bankrolled over the principal amount totalling USD 2.4 billion due over the next two financial years. China’s foreign ministry spokesperson said: “In principle, China and Pakistan have close cooperation in economic and financial sectors, and we will continue to advance cooperation with Pakistan to support the country in achieving stability and development.” In the past three months, China has rolled over loans worth USD five billion.

On 18 July, the IMF released the SBAsigned with Pakistan. The IMF approved a loan of USD 3 billion and noted that Pakistan’s economic challenges are complex and multifaceted and risks were exceptionally high. The IMF’s loan approval is crucial in getting loans from other allies and multilateral institutions. The financial cushioning by IMF and China on the looming default on Pakistan’s loan repayments and the liquidity crisis entails a conjunction of interests of Chinese and Western financial institutions. Pakistan yet again becomes a meeting ground of competing geopolitical interests in the South Asian peripheral geography.
Two options for Pakistan to hedge between two powers
First, the IMF and its macro benchmarks would stabilise liquidity but structural reforms will remain a tough pill. The press release assumed stronger policy execution and external financing as a way out from near-term uncertainty over liquidity and new loans. The report mentioned and recommended reforms in the energy and financial sector through better governance, financial viability and anti-money laundering protocols. In terms of monetary and fiscal policy, the report recommended a data-driven interest rate, aiming for disinflation and a market-aligned exchange rate in the former case. Disinflation measures tackled with a high-interest rate, like right now in Pakistan at 22 per cent, have been experimented and implemented in various countries since the 1980s. It has been found that after some initial reduction in inflation, nominal interest rates remained high due to a lack of confidence in the macroeconomic base of some countries. IMF has maintained that a tense political environment could also keep the future uncertain, especially the season of upcoming elections.

In the latter case of renewed fiscal policies, the report suggested the timely removal of import restrictions and implementation of taxation measures announced in the minibudget of 2023 for increasing revenue; controlling federal government expenditures; and securing critical social welfare expenditures, especially because of climate and food security. An editorial in Profit PK mentioned the liquidity and debt crisis has subsided for a while and termed the SBA-mandated policies on enhanced revenue projections as a ‘framing bias’ of IMF in accepting a far-fetched budget.

On 22 July, The Express Tribune reported the formation stages of a sovereign wealth fund through the sale of shares of seven Public Sector Undertakings (PSU) and using their earnings for capital investments. The assets are valued at USD 8.2 billion (PKR 32. trillion) and the list includes Oil and Gas Development Company Limited (OGDCL), Pakistan Petroleum Limited, National Bank of Pakistan, Pakistan Development Fund, Government Holdings Private Limited, Mari Petroleum Company Limited, and Neelum Jhelum Hydro Power Company Limited. IMF’s historical experience with emerging economies suffering from periodical liquidity crunch has been aimed at keeping pro-market policies to revive the depressed sentiment and market-based correction and equilibrium. That has not helped the engaged economies on a time scale though.

Second, meeting China’s -imperial in Pakistan. On 27 July, Hamid Mir, host of the most expensive evening news show in Pakistan shared his field visit film. The copper mine in North Waziristan became operational in the last decade and approximately USD 550 million worth of Copper was exported to China, a rise of 400 per cent in just over two years. According to a report by the Nation, the exports can reach a potential USD 10 billion from the whole of Pakistan. On 1 November 2022, the Executive Committee of the National Economic Council (ECNEC) approved railway infrastructure worth USD 11.3 billion. The debt portfolio with China has the following composition, deposits with SBP at USD four billion, approximately USD five billion of committed loans to Chinese (state-owned) Commercial Banks and lastly, USD 20 billion worth of infrastructure investment has already been expended under China Pakistan Economic Corridor (CPEC). As per the loan agreements, China has employed exceptional clauses on the right to demand immediate repayment, stabilization and buffer measures on projects from the impact of new laws. The IMF staff report mentioned that external financing requirement from China has been estimated at USD 4.6 billion in FY24. According to a report by USIP, Pakistan held external liabilities of USD 126.3 billion by December 2022, and China owes USD 27 billion of loans out of this debt portfolio. Pakistan also has currency swap agreements with China. The report further added that from April 2023 to June 2026, Pakistan needs to repay USD 77.5 billion in external debt.

However, China and West-backed multilateral institutions have not enjoyed a peaceful co-existence either. China is the largest bilateral creditor in Zambia and IMF and China have held discussions on agreeing on common principles. China has handed over USD 240 billion in overseas lending with its China-specific clauses across the world. Yet, the IMF is trying to find a common working principle indicates that the issue of debt relief measures is being addressed indicates that China has created its pole in lending and the same is being applied in Pakistan.

What does the IMF country report say, and what does it mean?,” PT Profit, 19 July, 2023
A framing bias: Pakistan has finally clinched another IMF deal, but at what cost?,” PT Profit, 2 July, 2023
Graciela L Kaminsky, Leonardo Leiderman, “
High real interest rates in the aftermath of disinflation: is it a lack of credibility?,” Journal of Development Economics, February 1998
Jack Denton, “
The West and China Can Get Along. Look at What’s Happening in Zambia,” Barron’s, 24 July 2023
Zain Naeem, “
Pakistan plans to launch Rs 2.3 trillion Sovereign Wealth Fund but how will price determination take place?,” PT Profit, 24 July, 2023
Pakistan's copper export to China increase by 400%,” The Nation, 31 March 2020
Ahtasam Ahmad, “
Are Chinese Loans To Blame For Pakistan’s Debt Crisis?,” The Friday Times, 28 July 2023

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