Skip to main content

U.S. To Squeeze China Through Pakistan

Aug. 2, 2018 1:29 AM

Summary

Pakistan external balance is deteriorating and it has external debt servicing needs.

US officials see the debt primarily to China through its infrastructure initiative.

The US could block new IMF assistance, if/when it is requested.

The US often struggles to convert its economic power into political outcomes, though President Trump has ramped up efforts to do precisely that. In the fight against terrorism, the US Treasury has greatly expanded its efforts to cut off financing and through the experience and the Great Financial Crisis, access to the US dollar market, including for funding, is not simply a utility but is a privilege that the US could deny its adversaries.

Advertisement

There are other ways in which the US can use its financial acumen to impose its will. Here is a drama that is unfolding, though it has not percolated into the public's consciousness yet. It begins in Pakistan, which has been party to at least 13 IMF programs since 1980. Although it has not formally asked for another one, macro considerations suggest it is likely. Many expect Pakistan's likely new Prime Minister, Imran Khan, to seek one shortly after assuming office. His party is about 22 seats shy of a parliamentary majority, after running a campaign against the two main ruling families. The US is threatening to veto it, which would make it hard for Pakistan to service its debt. Its debt is primarily owed to the IMF, World Bank, and China.

Pakistan is caught between a rock and a hard place. Given the number of times it availed itself to IMF assistance, it will be reluctant to stiff the multilateral lenders. It also wants to avoid having a debt problem with China, which has shown itself to be a harsh taskmaster. Loans from China are often not on concessionary terms and involve collateral. Recently, for example, Sri Lanka has to transfer ownership of Hambantota port to China (for 99 years, shades of Hong Kong).

China's loans to Pakistan are part of a $60 bln infrastructure development project dubbed China-Pakistan Economic Corridor (CPEC) which is part of China's Belt-Road Initiative (BRI) It borrowed an estimated 20% or $12 bln from Chinese commercial banks. Meanwhile, Pakistan's exports are falling, and combined with rising oil prices, is leading to deterioration of its current account and a draining of its official reserves. As of two weeks ago, Pakistan's reserves were reported at about $9 bln. This is less than two months of import coverage. The rupee has lost about 11.5% against the dollar this year after depreciating by 5.5% in 2017.

Reports suggest that Pakistan may need a few billion dollars to carry it through the next few months. The last IMF assistance was in 2013 for $5.3 bln. There have been some reports claiming that the country will seek as much as a $12 bln credit line. The IMF would likely demand concessions, and it could force the new government to backtrack from its campaign promises to boost social spending for education, healthcare, and the social safety net. The IMF projects the fiscal deficit could reach 7% this year compared with a 4.1% target.

China's liberal lending practices offer an alternative to the conditionality the multilateral lenders demand. US policymakers chaff under the Chinese efforts, which saddle countries with more debt and little incentive to reform. US policymakers recognize that China is using its loans to influence other countries. These projects often put the US businesses at a commercial disadvantage.

Advertisement

Pakistan is not unique in its struggle to repay its debt to China. A recent study by the RWR Advisory Group found that almost a third of the value of the loans related to China's Belt-Road initiative since 2013, or nearly $420 bln are in trouble due to persistent project delays, public opposition, and national security issues. Malaysia's new government has suspended new Chinese-backed infrastructure projects and reviewing existing projects. Cambodia's surge of capital equipment imports related to China's infrastructure projects is causing economic problems beginning with the trade deficit swelling to 10% of GDP.

Pakistan does not have many alternatives. In 1998, amid another debt crisis, Saudi Arabia agreed to defer oil payments. The Saudi's financial position has changed, and it may be less willing to delay payments again, which is a short-term fix in any event. The IMF expressed concerns about the implication of the CPEC investments on Pakistan's balance of payments a few months ago. However, the multilateral lender took exception at the US claim that emphasized CPEC loans with Pakistan's current straits. The IMF is engaged with Pakistan via the Post-Program Monitoring and regular Article IV consultations.

As of now, there is no formal request from Pakistan. The US has made its opposition known. A veto remains an implicit threat. However, there can be no mistake, the US is looking for ways it can block the expansion of China's influence. US policymakers and investors seem to be of two minds. On the one hand, they see a slowing economy, large debt, and an ossified political system, which is often seen as contradicting the modernizing economy. On the other hand, China is seen as pushing to supplant the US and the dollar. Since the 2016 US election, China has been defending the status quo, multilateral institutions, and trade. Chinese officials seem to believe that under the current rules, it can win. The US is the one seeking to change the rules of engagement.



https://seekingalpha.com/article/%3Clink%20rel=%22canonical%22%20href=%22https://seekingalpha.com/article/4193501-u-s-squeeze-china-pakistan%22%20/%3E

Comments

Popular posts from this blog

Balochistan to establish first medical university

https://www.dawn.com/news/1366135

The Newspaper's Staff CorrespondentOctober 25, 2017QUETTA: The provincial cabinet on Tuesday approved the draft for establishing a medical university in Balochistan.Health minister Mir Rehmat Saleh Baloch made the announcement while speaking at a press conference after a cabinet meeting.“The cabinet has approved the draft of the medical university which would be presented in the current session of the Balochistan Assembly,” he said, adding with the assembly’s approval the Bolan Medical College would be converted into a medical university.Published in Dawn, October 25th, 2017

5 Shia Hazara community members gunned down in Pakistan

http://m.hindustantimes.com/world-news/5-shia-hazara-community-members-gunned-down-in-pakistan/story-CHWR4lYByRHzf2KjHjMloI.html



Five members of the minority Shia Hazara community, including two women, were killed on Sunday in an attack by unidentified gunmen in Pakistan’s restive Balochistan province.This is not the first time that members of the Hazara community have been targeted in Quetta and other parts of Balochistan.(Reuters File Photo)Updated: Sep 11, 2017 00:20 ISTBy Press Trust of India, Press Trust of India, KarachiFive members of the minority Shia Hazara community, including two women, were killed on Sunday in an attack by unidentified gunmen in Pakistan’s restive Balochistan province.The gunmen targeted a car in Kuchluck area of Quetta while it was coming from the Chaman border crossing area, police said.The firing took place when the travellers had stopped at a filling station to refuel their vehicle. Five people of the Shia Hazara community, including two women, died in …

China’s 'Digital Silk Road': Pitfalls Among High Hopes

https://thediplomat.com/2017/11/chinas-digital-silk-road-pitfalls-among-high-hopes/


Will information and communication technologies help China realize its Digital Silk Road?By Wenyuan WuNovember 03, 2017In his speech at the opening ceremony of China’s 19th Party Congress, President Xi Jinping depicted China as a model of scientific and harmonious development for developing nations. Xi’s China wants to engage the world through commerce but also through environmental protection and technological advancement. This includes Beijing’s efforts to fight climate change with information and communication technologies (ICTs) that it plans to export along its “One Belt One Road” initiative (OBOR). Xi may have ambitious plans, but could China be throwing up obstacles in its own way?In his speech, the Chinese president emphasized the need to modernize the country’s environmental protections. The Chinese state is taking an “ecological civilization” approach to development and diplomacy, with a natio…