(Xi Jinping holding Imran Khan, the Pakistani Prime Minister)
Pakistan is not a country known for it financial stability. Since 1988, the nation has been the subject of 12 IMF bailouts totalling $19 billion and is currently in the process of trying to secure another IMF emergency package of up to $12 billion. Increased political risks have caused western investors to flee the country, with Imran Khan’s (the Pakistani Prime Minister) lack of commitment to austerity further decreasing investor confidence. To avoid the demands often posed by western led multilateral financial bodies, Pakistan has turned to the U.A.E. and Saudi Arabia for financial support. The Saudis agreed to supply a $6 billion dollar support package, but as of right now, it does not seem like that will be enough to cover Pakistan’s increasing foreign debts to, mainly China (Baqir Sajjad Syed, “Saudi Arabia pledges $6bn package to Pakistan”, Dawn). The aim of this essay is to briefly discuss the causes of the debt crisis, Chinese soft power, debt traps and the feasibility of an IMF bailout, both for the IMF backers and for Pakistan.
The two main factors that have contributed to the unsustainability of the Pakistani debt are long run current account and government deficits, with forecasts from the State Bank of Pakistan suggesting that the current account will worsen in 2019 (Trading Economics, “Pakistan Current Account”, Trading Economics). In essence: the Pakistani economy is not particularly competitive against the rest of the world and is therefore vulnerable and in a bad position to assist the government with, among other things, its dwindling supply of foreign currency. At the same time the Pakistani government has launched huge (and expensive) infrastructure projects supported by the Chinese Belt and Road Initiative, including roads and power plants. The Chinese tend to set lower institutional and policy demands for their investments, making them more favourable to the leaders of some developing countries than Western solutions. The lower financial standards and more political nature of Chinese investment however, to some, degree tend to create debt traps. This as a result of the fact that financially unsound investments, many of whom would not have received backing from multilateral institutions, have failed (Christopher Balding, “Pakistan’s Bailout Is Really China’s”, Bloomberg). To conclude, Pakistan has a relatively uncompetitive economy and a government that has invested a lot of money in projects it does not seem to be able to afford.
There are more countries than Pakistan who have seen difficulties in paying their debts to China. The somewhat vague Chinese investment deals on offer have left many smaller countries unable to keep up with the interest payments, some left with no other option than to give up assets of strategic importance to China instead. Sri Lanka was forced to lease one of their ports to China for 99 years, and Gareth Evans, former Australian foreign minister, has been quoted as saying that Cambodia and Laos effectively have become subsidiaries of China, as a result of their inability to repay their debts (John Pomfret, “China’s debt traps around the world are a trademark of its imperialist ambitions”, Washington Post). Even European countries like Montenegro have been hit, with their debt to gdp levels rising from roughly 10% to 45% of GDP as a result their participation in the the Belt and Road initiative (Tim Fernholz, “Eight countries in danger of falling into China’s “debt trap””, Quartz). All in all, a paper estimates that 8 countries are in high risk of becoming stuck in Chinese debt traps (Tim Fernholz, “Eight countries in danger of falling into China’s “debt trap””, Quartz). This is worrying, both for developing countries who might need to take a second look at the terms of their deals with China, and for the IMF. Voices, especially in the US, have been raised against providing a bailout for this reason. The risk that the money will serve as a bailout for Chinese investors, rather than the Pakistani economy, are by them deemed too great, which has made it more difficult for IMF and Pakistan to come to an agreement (Christopher Balding, “Pakistan’s Bailout Is Really China’s”, Bloomberg). To get a clearer view of the situation, the IMF has demanded that the investment deals and amounts be made public, so that the situation can be fully understood. The Pakistani government has continued to refuse, likely as a result of Chinese pressure, leading to further increased tension between the parties.
The expected amount needed to bridge the finance gap varies from the official Pakistani $12bn figure, up to expert assessments of $20bn (Maria Abi-Habib, “Pakistan Seeks I.M.F. Bailout as Government Sends Mixed Messages,” The New York Times). This further worries investors that Pakistan might not be going for a robust enough package to help solve the problems. Combine this, with what is likely to be tough IMF demands, especially with regards to austerity, increased taxes and more liberal legislation, and the outlook from Pakistan’s government, does not seem favourable. As mentioned earlier, this is one of the main reasons Pakistan has tried to secure funding from other sources than the IMF, like China and Saudi Arabia. It seems however, that they’ll be unable to raise the required funds using those sources. Most multilateral institutions, like the World bank, more or less require that the countries follow certain economic guidelines set by the IMF, making those institutions as unattractive as the IMF. Based on this, it seems that the most likely outcome is that Pakistan will have to accept the harsh IMF demands, or suffer the fate of other victims of the Chinese debt traps. Whether or not the government will keep their end of the bargain in the long run is another question, but in the short run, it does not seem like they have any other valid choice.
(Trading Economics, “Pakistan Current Account”, Trading Economics, 2018).
https://tradingeconomics.com/pakistan/current-account?continent=europe Fetched (01-12-18)
(Baqir Sajjad Syed, “Saudi Arabia pledges $6bn package to Pakistan”, Dawn, 2018). https://www.dawn.com/news/1440974 Fetched (01-12-18)
(Christopher Balding, “Pakistan’s Bailout Is Really China’s”, Bloomberg, 2018)
https://www.bloomberg.com/opinion/articles/2018-07-31/pakistan-s-bailout-is-really-china-s Fetched (01-12-18)
(John Pomfret, “China’s debt traps around the world are a trademark of its imperialist ambitions”, Washington Post)
https://www.washingtonpost.com/news/global-opinions/wp/2018/08/27/chinas-debt-traps-around-the-world-are-a-trademark-of-its-imperialist-ambitions/?noredirect=on&utm_term=.5edd21fd6362 Fetched (01-12-18)
(Tim Fernholz, “Eight countries in danger of falling into China’s “debt trap””, Quartz)
https://qz.com/1223768/china-debt-trap-these-eight-countries-are-in-danger-of-debt-overloads-from-chinas-belt-and-road-plans/ Fetched (01-12-18)
(Maria Abi-Habib, “Pakistan Seeks I.M.F. Bailout as Government Sends Mixed Messages,” The New York Times)
https://www.nytimes.com/2018/10/11/world/asia/pakistan-imf-bailout-imran-khan.html Fetched (01-12-18)
