Testing times for Pakistan’s ties with China

It turns out, just as some critics had assumed, that PML-N’s “not going back to IMF” mantra did not imply a suddenly self-sufficient economy, but rather a new patron and a slightly different manner of external funding to keep the markets alive. And that is why Pakistani borrowing from China is nearing the $5b mark just as the fiscal year is drawing to a close. Since that is more or less the same amount as our dollar debts due for this year, it can be safely said that Beijing is fast replacing Washington as Islamabad’s lender of last resort.

Also, while ruling out IMF (of course), Miftah Ismail (now former finance minister) did test the waters for some non-IMF aid (ADB, IDB) during his spring meetings with donors in Washington a month or so ago, but with zero luck. All he got was an invite, as guest, to the Islamic Development Bank’s annual meeting in Manila some time later this year.

The shift to China comes just as the Trump administration begins turning off the money tap after years of mistrust stemming primarily from the Afghan war. So far this year, Pakistan’s borrowing from China includes installments of $1.2b, $1.7b, then $1b just after the budget (which the central bank governor announced so proudly), and then possibly another $2b just before the fiscal expires. It seems that borrowing from state owned Chinese banks on commercial terms is fast becoming the new norm, instead of knocking at Uncle Sam’s door every time reserves turn red.

Yet it remains to be seen how far China will go out of its way to keep Pakistan afloat, especially considering its large CPEC investment in the country. A third of Pakistan’s reserves have simply evaporated over the last fiscal. Reserves in May were just over $10b, down from almost $17b a year ago, and good for barely two months of import cover. That is why, in addition to above funding, Beijing also agreed to roll over for one more year a $500m loan that was maturing this June. Apparently, the People’s Bank of China (PBC), through the country’s State Administration of Foreign Exchange (SAFE), deposited $500m in the State Bank of Pakistan (SBP) in June 2012 just to

‘shore up reserves’.

We could not touch a penny of it. And now we need it to just sit there and look pretty for one more year while we fix the black hole in our balance of payments. For now,

China is happy to route some of its excess dollar reserves towards Pakistan, if only to keep it from taking the begging bowl to the Fund once more. That would, after all, oblige us to open our books to the donors and divulge all sorts of CPEC transactions that China wants us to keep mum about.

These compulsions have forced Pakistan into another unhealthy spiral where Beijing pushes it to buy Chinese equipment for use in Chinese projects — bleeding the reserves — only to extend loans which sends Pakistan’s debt soaring even further. But “beggars can never be choosers,” as former finance minister Salam Shah rightly pointed out to Khaleej Times a few days ago. And China “is far better for us than America or the IMF because it is still there when others are shutting the capital markets on us.”

One of our chronic problems is also a runaway import budget. As one administration after the other has learned, no manner of taxes can keep our elite from their luxury imports. Flushed with stolen money, our industrial and feudal barons simply do not mind how much extra they have to pay in tax, or bribes, for their luxury lifestyle. And it does not help policy matters much that most of these people are either in parliament or linked to it.

And that, more or less, is why PML-N too lived off borrowed money and raised the external debt profile by more than 50pc, to the tune of $92b, jacking up the public debt to GDP ratio to an unsustainable 70pc.

The ministry of finance, only days after shedding PML-N influence, also warned the caretaker PM in no uncertain terms of the risk of default without the immediate support of the IMF, contrary to the previous government’s promises.

But since IMF’s previous 36-month Extended Fund Facility was worth $6.64b, and since Pakistan needs to borrow around $13b for debt repayment next year, after the outgoing government borrowed $44.2b to repay maturing debt, provide cushion to forex reserves and finance the import bill, it is very unlikely the IMF will play along particularly when relations with Washington are not good. Hence, most likely, the begging bowl will stay in Beijing at least as long as CPEC compulsions push the Chinese to keep Pakistan solvent.

Yet it remains to be seen how far China will go out of its way to keep Pakistan afloat, especially considering its large CPEC investment in the country.

Shahab Jafry is a journalist based in Pakistan

For now, China is happy to route some of its excess dollar reserves towards Pakistan, if only to keep it from taking the begging bowl to the Fund once more