Chi­nese loans

The Pak Banker - - FRONT PAGE -

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.

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