According to a report, Pakistan expects to obtain fresh Chinese loans worth $1-2 billion to avert a balance of payments crisis. Lending to Pakistan by China and its banks is about to hit $5bn in the fiscal year ending in June, as per recent disclosures by officials and the finance ministry data.The spike in China's lending comes as borrowing from other sources has become difficult. It may be added here that in February, Washington initiated moves that saw Pakistan placed on a global terror financing watch list, amid fears in Islamabad that it will hurt the economy.The new Chinese loans that are being negotiated will help bolster Pakistan's rapidly- depleting foreign currency reserves, which tumbled to $10.3bn two weeks back from $16.4bn in May 2017.
Over the past nine months Pakistan has enacted a series of measures to combat its current account deficit, including hiking tariffs on more than 200 luxury items and devaluing its currency by about 10pc. In the six months to end of March, Pakistan took bilateral loans worth $1.2bn from China. During this period the government also borrowed about $1.7bn in commercial loans, mostly from Chinese banks. In April, Pakistan's central bank borrowed another $1bn from Chinese commercial banks to buffer its reserve. The decline in reserve and a sharp widening of Pakistan's current account deficit have prompted many financial analysts to predict that after the general election, Islamabad will need its second International Monetary Fund (IMF) bailout since 2013. The last IMF assistance package was worth $6.7bn. Beijing's attempts to prop up Pakistan's economy follow a deepening in political and military ties in the wake of China's pledge to fund badly-needed power and road infrastructure as part of the $57bn China-Pakistan Economic Corridor (CPEC), a key link in Beijing's Belt and Road initiative.
Apparently, the new Chinese loans are aimed to boost Pakistan's sharply declining foreign currency reserves, which tumbled to $10.3bn last week from $16.4bn in May 2017. While increase in loans may be a momentary relief for our current reserves, loans have unpleasant consequences for Pakistan's balance of payments. The widening of our current account deficit makes it likely that after the elections, Islamabad will need its second International Monetary Fund ( IMF) bailout since 2013.Although Pakistan's economic growth has soared to nearly 5pc, the fastest pace in 13 years, the structural problems with the economy are coming to the fore. It is similar to 2013. The gloomy macroeconomic outlook prompted the IMF earlier this month to downgrade its economic growth forecast for Pakistan to 4.7pc for the next fiscal year ending in June 2019, way below the government's own ambitious target of 6.2pc.
So far, all the measures appear to have had a limited impact on Pakistan's economy and foreign exchange reserves continue to nosedive. In the past three weeks, reserves have declined by $1.2bn and now stand at two months' worth of import cover. The collapse of the reserves is mainly due to the central bank's efforts to maintain an artificially strong rupee over the past few years. The new Chinese money is in the nature of a temporary relief until August or September, when a new government will come into office and the country may have to opt for a new IMF programme.
Pakistan may also seek help from Saudi Arabia which lent $1.5bn to Pakistan in 2014 to shore up its foreign currency reserves. Successive governments in Pakistan have a record of taking the money without worrying about the consequences or the strings that might come attached. Regarding Chinese loans, we seem to have entered uncharted waters. The fear is that as these loans grow, the deficits will persist. And no one knows where all this will lead to.