Skip to main content

Is China to blame for Pakistan’s economic woes?

Despite Prime Minister Imran Khan’s calls for financial self-sufficiency, Pakistan has been forced to seek a bailout from the IMF as the country’s economic situation continues to deteriorate. If approved, the bailout would be Pakistan’s 13th since 1980 and potentially the largest; between $6 and $12 billion is currently being sought. We argued in July that Pakistan’s rapidly expanding current account deficit combined with plummeting foreign reserves would likely lead to the country having no choice but to go to the IMF. The past week proves that hypothesis, but the question remains as to why Pakistan’s current account deficit and competitiveness has deteriorated to this extent despite multiple warnings. The US is blaming China, and has firmly said that it will veto any IMF bailout that would help to repay loans to China. But is China really to blame for Pakistan’s economic woes?

Pakistan’s Prime Minister Imran Khan has been forced to go to the IMF for emergency funding
Source: Livemint

Our short answer is – no. While there is no doubt that China’s loans to Pakistan – mostly designated to fund the China-Pakistan Economic Corridor (CPEC) under the Belt and Road Initiative – have contributed to Pakistan’s widening current account deficit, it is the economic mismanagement of successive Pakistani governments that remains the real cause.

Looking at the data shows how the CPEC has widened the current account deficit. Pakistan has used financing from China to pay for capital equipment imports from China as well as the services of Chinese contractors dominating the construction of CPEC.

Pakistan’s trade deficit with China amount to $9.7 billion in FY 2018, representing 26% of Pakistan’s total deficit. On top of that are debt repayments to China, amounting to $300 million a year over the next three years according to Finance Minister Umar. Again though, this amounts to only a small proportion of debt obligations which are currently $9 billion in this fiscal year alone.

Pakistan’s trade deficit has nearly doubled in the last five years and is the primary cause for current economic problems

Some of the fastest growing items in Pakistan’s trade deficit were imports from China – including rolling stock, electrical equipment, iron and steel. But while significant, imports and loans from China are not the primary cause for Pakistan’s economic woes given that they only represent around a quarter of all imports. Of greater importance has been increasing oil prices – Pakistan imports around 80% of its oil needs – amounting to over $8 billion. A weakening rupee has also made imports more expensive.  

It’s also worth noting that trade deficits do not have to be a cause for concern if managed correctly. Indeed, China ran significant current account deficits in its early years of development and did not run into budgetary or currency crises. In 1985 for example, China’s current account deficit amounted to around 4% of GDP. But China used its trade deficit to propel growth through importing capital equipment, and economic management was sufficiently sound to avert crisis. This meant that China did not splurge on current expenditure – in sharp contrast to Pakistan. PM Khan has pledged greater public spending through a welfare state and housing projects – yet such expenditure is difficult to maintain given Pakistan’s existing budgetary position.

While China coincided its trade deficits with economic reform and liberalization that drove competitiveness and laid the foundations for China’s export machine, Pakistan has up to now failed to undertake the necessary reform. For example, the country has one of the lowest tax to GDP ratios in Asia, and has not fixed its strained energy system. 

With the IMF now intervening, the institution will invariably demand further reform from Pakistan and this time enforce its requirements more strictly. The IMF has already requested that Pakistan share the structure, interest rates and duration of all Chinese loans – and consequently will likely prescribe a slowdown of CPEC. The size of the IMF bailout will determine how much leverage the institution has over Pakistan, and in turn to what extent CPEC will be moderated. Already, of its own volition, Pakistan has cut the value of a Chinese rail project by $2 billion.

So while China has not been the primary driver of Pakistan’s economic woes, the progress of CPEC will likely slow down as a result. Arguably, the Chinese could have seen this coming given Pakistan’s past history of economic management. They could have averted this crisis by encouraging the country to embark on reform as a necessary condition for receiving Chinese loans with the inauguration of CPEC in 2013. Despite this, CPEC as a whole will survive due its multidimensionality in scope and popularity amongst the local Pakistani population.

But this episode should be another signal to the Chinese that they need to develop strategies that allow BRI to progress without the fate of projects swinging like a pendulum. Beijing is starting to take notice, and China’s Vice Finance Minister Zou Jiayi on Saturday acknowledged debt issues with some of some BRI projects, saying that the government will strengthen macro-supervision on the debt sustainability aspect of its overseas investments.


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 …

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…

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…