Skip to main content

Could China replace the IMF?

By Waqas Aslam Rana

Published: September 1, 2018

The possibility of Chinese financial assistance expands Pakistan’s menu of choices, in comparison with the past when the IMF was the only option. PHOTO:FILE

In his first address to the nation as Prime Minister, Imran Khan singled out growing debt as one of Pakistan’s fundamental economic challenges and reiterated his personal aversion to the proverbial ‘begging bowl’. This was a thinly veiled reference to Pakistan’s historic reliance on, some would say addiction to, the International Monetary Fund (IMF) as a source of borrowing.

Employing such rhetoric is a rite of passage for every new government, blaming the previous one for handing over a struggling economy. In doing so, newly-elected leaders hope to limit the political fallout from tough decisions they know are unavoidable. And the toughest decision facing Prime Minister Khan and his economic team right now is how to avert a looming balance-of-payments crisis.

According to the State Bank of Pakistan (SBP), the current account deficit for fiscal year 2017-18 ballooned to $18 billion, 44% higher than last year. Put simply, this means that exports and remittances fell far short of covering much higher levels of imports. Net FDI and the SBP’s reserves are not enough to make up this shortfall. Factoring in interest payments on foreign debt coming due this fiscal year, the macroeconomic accounting is clear. Pakistan simply does not have enough foreign currency to meet its short-term financial liabilities and trade needs. And since our central bank cannot print dollars, we must borrow them from someone.

Pakistan needs $9b for running domestic economy: Umar

And this brings us back to the IMF. The Fund has played the role of the ‘lender of last resort’ for developing countries across Latin America, Africa and Asia for decades. But its emergency loans come with standard neoliberal policy prescriptions of austerity, forcing governments to cut social spending, drastically, hike interest rates and slap additional taxes. Successive IMF programmes in Pakistan and elsewhere have shown that they provide short-term macroeconomic stability at the cost of growth, while systemic economic problems persist. Is history doomed to repeat itself in 2018?

Enter the dragon. China’s $1 trillion multi-continent Belt and Road Initiative (BRI) that seeks to reshape global trade and commerce has given new options to countries in the Global South. Since the beginning of the China-Pakistan Economic Corridor (CPEC) in 2016 — a flagship BRI project — political and economic ties between Beijing and Islamabad have intensified rapidly. China has a vested interest in preventing an economic meltdown in Pakistan, which would endanger its existing and planned investments. Already, it has lent $7.4 billion outside of CPEC over the last 13 months to support the external sector. This is more than the $6.4 billion IMF programme Pakistan underwent during 2013-16. So in a sense, China has already given us a mini-bailout.

Asad Umar briefs PM on state of economy

Apart from protecting its investments, China has larger strategic reasons for replacing the IMF as Pakistan’s chief source of foreign funding. As it competes with the US for global influence, its strategy hinges on expanding alliances through trade and investment, with the BRI as the linchpin in this grand scheme. In this context, CPEC is an important node in the BRI chain. Special economic zones (SEZs) to be set up in Pakistan will serve as bases for export-oriented Chinese industries, helping them remain competitive as labour costs inside China rise. Another critical factor is energy security. Currently, about 80% of Chinese energy imports pass through the narrow Straits of Malacca linking the Indian Ocean with the South China Sea, which Beijing believes could be blockaded by the US navy in a major geopolitical standoff. A planned pipeline in Pakistan allowing China to directly transport oil from the Persian Gulf via Gwadar port, along with similar projects in Thailand and Myanmar, seeks to establish alternative energy supply routes. Letting CPEC fail would entail financial losses, but more importantly, it would be seen as a foreign policy mistake of the Chinese leadership.

The possibility of Chinese financial assistance expands Pakistan’s menu of choices, in comparison with the past when the IMF was the only option. By leveraging China’s CPEC-related strategic imperatives, the new government has an opportunity to secure a bailout with less odious terms than in the past. Together with funds raised from global capital markets through bond issuances, this can simultaneously help avert a balance-of-payments crisis and US political pressure that comes with IMF money. The question then becomes, what are the trade-offs from a potential Chinese bailout?

A general trend observed in China’s engagement with numerous developing countries is that it does not like to micro-manage. Therefore, any fresh loans to stabilise Pakistan’s economy are likely to come with few, if any, formal constraints on fiscal and monetary policymaking. This would allow the government to maintain a degree of autonomy and give it a better chance of implementing its agenda.

On the other hand, some concessions will almost certainly be demanded in return. These may include higher equity stakes in ongoing CPEC projects, a larger role in deciding future ones, and greater market access for Chinese firms. Sri Lanka’s Hambantota port is a case in point, in which China acquired a controlling stake and a 99-year lease in 2017 after the former’s failure to repay loans. And reflecting growing unease about the BRI, re-elected Malaysian Prime Minister Mahathir Mohamad this month cancelled $22 billion worth of Chinese projects, questioning their economic rationale and citing debt concerns. These examples, at the very least, show that the terms for any further Chinese loans need to be carefully considered.

Prime Minister Khan and his cabinet must seriously assess the broader impact on Pakistan’s economy of closer integration with China, and devise a policy to balance the potential risks and benefits. In particular, effects on the competitiveness of local industries, fiscal sustainability in the wake of increased CPEC-related infrastructure spending, and the potential for local job creation from Chinese investment all need to be critically evaluated. Keeping true to his pre-election rhetoric, Asad Umar should initiate a debate on these issues in parliament, and build an informed consensus before embarking on the next phase in our economic history.

Published in The Express Tribune, September 1st, 2018.


Popular posts from this blog

SSG Commando Muddassir Iqbal of Pakistan Army

“ Commando Muddassir Iqbal was part of the team who conducted Army Public School operation on 16 December 2014. In this video he reveals that he along with other commandos was ordered to kill the innocent children inside school, when asked why should they kill children after killing all the terrorist he was told that it would be a chance to defame Taliban and get nation on the side. He and all other commandos killed children and later Taliban was blamed.
Muddassir Iqbal has deserted the military and now he is  with mujahedeen somewhere in AF PAK border area”
For authenticity of  this tape journalists can easy reach to his home town to interview his family members or   ISPR as he reveals his army service number”
Asalam o Alaikum: My name is Muddassir Iqbal. My father’s name is Naimat Ali. I belong to Sialkot divison (Punjab province), my village is Shamsher Poor and district, tehsil and post office  Narowal. Unfortunately I was working in Pakistan army. I feel embarrassed to tell you …

The Rise of China-Europe Railways

The Rise of China-Europe RailwaysMarch 6, 2018The Dawn of a New Commercial Era?For over two millennia, technology and politics have shaped trade across the Eurasian supercontinent. The compass and domesticated camels helped the “silk routes” emerge between 200 and 400 CE, and peaceful interactions between the Han and Hellenic empires allowed overland trade to flourish. A major shift occurred in the late fifteenth century, when the invention of large ocean-going vessels and new navigation methods made maritime trade more competitive. Mercantilism and competition among Europe’s colonial powers helped pull commerce to the coastlines. Since then, commerce between Asia and Europe has traveled primarily by sea.1Against this historical backdrop, new railway services between China and Europe have emerged rapidly. Just 10 years ago, regular direct freight services from China to Europe did not exist.2 Today, they connect roughly 35 Chinese…

CPEC Jobs in Pakistan, salary details

JOBS...نوکریاں چائنہ کمپنی میںPlease help the deserving persons...Salary:Salary package in China–Pakistan Economic Corridor (CPEC) in these 300,000 jobs shall be on daily wages. The details of the daily wages are as follows;Welder: Rs. 1,700 dailyHeavy Duty Driver: Rs. 1,700 dailyMason: Rs. 1,500 dailyHelper: Rs. 850 dailyElectrician: Rs. 1,700 dailySurveyor: Rs. 2,500 dailySecurity Guard: Rs. 1,600 dailyBulldozer operator: Rs. 2,200 dailyConcrete mixer machine operator: Rs. 2,000 dailyRoller operator: Rs. 2,000 dailySteel fixer: Rs. 2,200 dailyIron Shuttering fixer: Rs. 1,800 dailyAccount clerk: Rs. 2,200 dailyCarpenter: Rs. 1,700 dailyLight duty driver: Rs. 1,700 dailyLabour: Rs. 900 dailyPara Engine mechanic: Rs. 1,700 dailyPipe fitter: Rs. 1,700 dailyStorekeeper: Rs. 1,700 dailyOffice boy: Rs. 1,200 dailyExcavator operator: Rs. 2,200 dailyShovel operator: Rs. 2,200 dailyComputer operator: Rs. 2,200 dailySecurity Supervisor: Rs. 2,200 dailyCook for Chinese food: Rs. 2,000 dailyCook…