Pakistan election aftermath: Imran Khan’s main challenge will be to fix an economy crippled by Chinese debt

Just as the Pakistan election process finally winds up and Pakistan Tehreek-e-Insaf (PTI) chief Imran Khan awaits in the wings for his ceremonial take over, attention is back to the need to shore up the Pakistan economy.

Bureaucrats and financial heads who probably spent the entire election period pouring over the accounts of the state may have now some reason to rejoice – even if temporarily. China has just announced a fresh $2 billion loan for the straitened economy.

That loan cannot replace the conditional largesse expected from the International Monetary Fund (IMF), which was due to be negotiated well before the end of the last government. But no outgoing party wants to be seen negotiating stringent loans just before elections, particularly when the loan amount required is likely to be the highest in eleven years.

That Pakistan’s economy is in serious trouble is now recognised by almost all concerned. As Bloomberg notes, this is a country that has had three currency devaluations since December, and with external debt and liabilities of 31 percent of GDP, which is the highest in the last 6 years.

The State Bank of Pakistan, which is one of the few institutions in Pakistan that retains integrity, is also uneasy. Its quarterly report of March 2018 warned that “despite 10 consecutive months of exports growth and rising workers’ remittances, a high import bill resulted in record widening of current account deficit. This in turn led to foreign exchange reserves falling to only two months of import cover”. In other words, as the China Pakistan Economic Corridor projects gather pace, there is no money in the kitty to pay for it.

Representational image. ReutersRepresentational image. Reuters
By May, a detailed report from Reuters quoting government reports indicated that despite several loans from China starting before March, the external balance situation remained dire. Its data indicated that Pakistan took bilateral loans worth $1.2 billion from China prior to March, while another $1.7 billion was negotiated in commercial loans, mostly from Chinese banks.

A month later, Pakistan’s central bank borrowed another $1 billion from Chinese banks to buttress its reserves, following it up in June with another $1 billion. The additional $2 billion was announced on 28 July in what was described as “official bilateral inflow”, which probably means that this will have a lower interest rate than the commercial loans. That brings total Chinese loans provided between March 2017 and July 2018 to more than $7 billion.

Under normal circumstances, there is nothing much unusual to an ‘all-weather’ ally providing funds to an indigent state. However, three circumstances make this infusion of cash suspect. The very first issue is the ‘mystery’ factor. All of China’s dealings under the CPEC umbrella are cloaked in secrecy, with even the State Bank often kept out of the picture. Even within Pakistan, there has been unease as to the actual terms under which these loans are being negotiated.

Then, there is the undeniable fact that China is not known to provide freebies to anyone, and if Hambantota in Sri Lanka is any guide (or projects in Angola, Ethiopia, and Kenya), Chinese ‘loans’ tend to act as a stranglehold on the country rather than a benefit. Which is why the IMF is likely to ask more questions before it hands out another tranche of assistance. The reported loan amount being asked for is $12 billion, which is nearly double what was provided merely two years ago.

Before providing this kind of assistance, the IMF’s line of inquiry is likely to be about details on all aspects of Chinese loans which include interest rates, paypack period and other conditionalities that may prejudice the very economic growth which the IMF is meant to address. Rather reasonably, it would make little sense for the IMF to prop up an economy with funds that are likely to flow out, in effect, to pay back loans to China.

This is essentially what is being pointed out by Secretary of State Mike Pompeo in his interview, where he says “we will be watching what the IMF does. There’s no rationale for IMF tax dollars — and associated with that, American dollars that are part of the IMF funding — for those to go to bail out Chinese bondholders — or China itself.” The US has had an uneasy relationship with the IMF during the Trump administration, but in this case, the statement is likely to get a lot of support among major financial institutions who are already concerned about Chinese practices.

Then, there is the second factor, which is the issue of Pakistan’s unstable economic situation. Pakistan has undergone at least 21 IMF programmes since 1958, and as pointed out by Mark Sobel who was the US representative on the IMF in early 2018, the programmes did not deliver the desired result, which was to ease Pakistan out of a low growth trajectory.

Sobel also makes an interesting suggestion. He observes that “the IMF should explore seeking the support of the Pakistani Opposition. The fund must stand ready to halt disbursements at the first sign of problems”.

An exceptional analyses by Khurram Hussain points out that the IMF has made suggestions for political agreement before, but only during the period of an interim government. If the IMF does ask for this, it puts the prime minister-in-waiting Imran Khan in the position of having to consult with the (soon to be united?) Opposition, even before he’s had a chance to pick up the crown and scepter of governance.

There’s another way of analysing this. Economists can cite chapter and verse of the many structural problems of Pakistan’s economy, but many of these factors — including a low tax collection base — are common to other countries like India as well. The non-quantifiable factor is the political instability that marks the country, where the gains made by one government are often frittered away in a “one step forward, two steps back” dance of decay.

For example, former Pakistan prime minister Nawaz Sharif’s term had seen a fair degree of economic recovery, which was eventually squandered away as political instability reigned for more than a year. The coming of Imran Khan, clearly backed by the army, is hardly likely to send the right signals to investors and economic managers. Therefore, the question that arises is whether the provision of $2 billion is meant to be a vote of confidence in the new prime minister. In short, is the whole IMF counter and Chinese largesse linked to the new political face of Pakistan?

An examination of the facts, however, shows otherwise. China has provided far more to Pakistan – nearly $5 billion – well before the end of Sharif as prime minister. US pressure on Pakistan also increased well before that period. Remember Trump’s “lies and deceit” tweet and his threat of ending aid was during the beginning of the year.

This has nothing to do with Khan or Sharif. Besides, Islamabad has a far more reliable friend in the Pakistan army anyway, which – apart from being directly involved in major CPEC projects – also happens to be running the country. The economic assistance is therefore linked to ensuring the success of CPEC, the flagship project of the massive “Belt and Road Initiative”, which in turn is a vital necessity to allow continuing growth (and stability) back home in Beijing.

In some ways, it’s not even about Pakistan, except that Islamabad is in the middle of a new Great Game with Chinese characteristics. For India, a thriving politically and economically stable Pakistan is no threat at all. A Pakistan that is heavily in debt and tied to China definitely is. Puppet shows look like being the order of the day. Strategic experts are already spooked. So is the IMF.


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