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Pakistan turns to China to avoid foreign currency crisis

© Bloomberg Farhan Bokhari in Islamabad and Kiran Stacey in New Delhi

MAY 23, 2018 17 Pakistan has again turned to China for help in avoiding a foreign currency crisis, deepening the two countries’ economic ties by borrowing $1bn from Chinese banks in April, Pakistan’s central bank governor has revealed. In an interview with the Financial Times, Tariq Bajwa confirmed the loans were made by Beijing-backed banks, at what he said were “good, competitive rates”. The money strengthens the financial, political and military ties between the two countries and underlines the increasingly assertive role Beijing is playing in south Asia and beyond.

With Pakistan’s foreign exchange reserves dwindling due to falling exports and rising imports, officials in Islamabad hope the cash will help Pakistan avoid having to go to the International Monetary Fund for another bailout, having done so 12 times previously since 1988. Pakistan had $10.8bn in foreign currency on May 11 — the most recent figures available — down from $18.1bn as of April 2016. Officials said China was happy to lend the money despite Pakistan’s fiscal crunch, in part because it does not want details made public about the loans it has made as part of the China-Pakistan Economic Corridor.

Recommended The Big Read Pakistan shuns US for Chinese high-tech weapons China is spending $60bn building up Pakistan’s infrastructure as part of its Belt and Road Initiative to create a network of trade routes around the world. However, Beijing has been reluctant to reveal details of the loans it is providing to Islamabad as part of that project. One civil servant in Islamabad said: “The Chinese are not keen on western institutions learning the minute details of [financing of] CPEC projects. An IMF programme will require Pakistan to disclose the financial terms to its officials.” The loans follow the $1.2bn that Chinese banks lent to Pakistan in the 12 months to April 2017, and officials said more was likely to follow. One senior adviser in Islamabad told the FT that the finance ministry had held informal discussions with Chinese banks to borrow at least $500m more before the end of the financial year ending in June 2018. 

“Borrowing from China has become an increasing feature of our external side,” the adviser said. Mr Bajwa added: “Chinese commercial banks are awash with liquidity.” But some economists warn the Chinese loans are merely a stopgap. Mushtaq Khan, a former central bank economist now running the Doctored Papers advisory group, said: “Pakistan’s policymakers are not doing enough to narrow the external deficit — instead they’re just financing the gap. “China factors importantly into this financing, but that doesn’t really solve our problem — it only postpones and exacerbates the issue.” With US President Donald Trump taking a hard line towards Pakistan, the country’s leaders have prioritised strengthening relations with China instead, which now provides everything from loans to power plants and weapons to its southern neighbour.  Pakistan imported $514m worth of arms from China last year, according to data from the Stockholm International Peace Research Institute, compared with just $21m from the US.

At the same time, however, Mr Trump has also recommitted to the Afghan war, which some military analysts warn will need backing from Islamabad to be successful


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