FeaturedInternationalVolume 14 Issue # 07

Pakistan’s balance of payment crisis averted?

Some local and international experts have claimed that Prime Minister Imran Khan has returned empty-handed from China while Finance Minister Asad Umar said Pakistan’s balance of payment crisis had been resolved after Saudi Arabia and China equally filled a gap of $12 billion. Questions are also being raised about the cost of the foreign loans and the opposition has asked the government to make “secret conditions” public and discuss them in the parliament.


The international media says Pakistan has no choice except to approach the International Monetary Fund (IMF) for a second bailout in five years as Prime Minister Imran Khan wrapped up a four-day visit to China without achieving his primary goal of securing Chinese financing. “Beijing is committed to assisting Islamabad but more talks are needed,” Chinese Vice Foreign Minister Kong Xuanyou was quoted as saying after a meeting between Imran Khan and Chinese Premier Li Keqiang. Pakistan’s economy, however, may not be able to wait much longer. The country urgently needs a capital boost in order to avert a looming balance of payments crisis. Foreign reserves held by the central bank dropped below $8 billion in late October, raising concerns about Islamabad’s ability to finance monthly import bills, a report in CNBC said.


Quoting experts, the report said Beijing’s decision to hold off on more loans worth $2 billion may be tied to the trade spat with Washington as the world’s second largest economy has experienced tightened liquidity conditions recently amid currency declines and pressure from U.S. President Donald Trump’s tariffs. “China’s refusal to agree to anything specific during Khan’s trip is a bit of a setback,” said Michael Kugelman, deputy director of the Asia program and senior associate for South Asia at the Wilson Center. But given rising concerns in Pakistan about the CPEC, Xi’s government may be signaling “that it’s time for Pakistan to figure out how to make things work,” he added. Without more external financing, an IMF bailout for Pakistan now appears inevitable. Many economists argue that IMF loans create a debt trap for emerging economies but the same has also been said about Chinese investment. “Islamabad wanted to get some degree of financial support from a bilateral partner so that it can bring down its ask of the IMF,” according to Kugelman. “The way Islamabad sees it, the less it needs to ask from the IMF, the more leverage it may have at the negotiating table with the Fund. The United Arab Emirates could also be a potential lifeline for Khan’s administration following reports that both countries held discussions about a deferred oil payment facility,” he added.


China pledged further economic aid for Pakistan, but has yet to provide details of how it will help the country’s troubled economy. China’s Premier Li Keqiang and his Pakistani counterpart Imran Khan signed 15 agreements and memorandums of understanding in the Great Hall of the People in the Chinese capital, pledging stronger cooperation in fields such as poverty alleviation, agriculture, industry and science. According to the South China Morning Post, China has promised more economic aid for Pakistan, but won’t yet commit to specific pledges. Quoting Chinese experts, it said China would offer economic assistance, but it was the Pakistan government’s responsibility to tackle its economic problems. Beijing also took a firm line on various infrastructure agreements between the two sides under the China-Pakistan Economic Corridor (CPEC). China has already pledged more than US$60 billion to Pakistan in the form of loans and investments for roads, ports, power plants and industrial estates under the scheme. But Pakistan’s ability to meet the repayments has long been a matter of some concern and Imran Khan had signalled before his election victory that he was keen to renegotiate some of the deals. The shift in tone on the CPEC projects may indicate that they are a precondition for further Chinese economic aid. China strongly believes that CPEC projects bring greater stability to both Pakistan and China. The economic corridor project will certainly boost the local economy of Pakistan as it would create new jobs and inject cash into local communities. Simultaneously, CPEC projects will also bring stability to China’s southwestern region and it would push for their implementation despite Pakistan’s debt concerns.


Earlier, Saudi Arabia announced a $6 billion bailout package for Pakistan’s ailing economy. The package included $3b balance of payments support and another $3b in deferred payments on oil imports. “The Saudis have basically given $6 billion in assistance as a ‘thank you’ to the Pakistani government for standing by them during a time of crisis,” director of South Asia practice at strategy firm Albright Stonebridge Group, Uzair Younus, told CNBC. “It is definitely linked to journalist Khashoggi’s murder. The deal likely came with an unstated expectation that Pakistan will need to reassert its allegiance to the Saudis in the Saudi Arabia-Iran rivalry, despite the new Pakistani government’s robust expressions of neutrality,” said Michael Kugelman, deputy director of the Asia program and senior associate for South Asia at the Wilson Center.


The opposition also raised questions when Prime Minister Imran Khan said Pakistan would act as a mediator in the war between Houthi rebels and the Saudi Arabia-led alliance in Yemen. Addressing the nation, he said he would try to bring the Muslim countries closer together, besides acting as a mediator in resolution of conflicts between them. The Pakistan Peoples Party (PPP) said the prime minister must tell the nation about Saudi conditions as it feared Pakistan would become a party to the Yemen war, being fought between Iran and Saudi Arabia.


Experts say Pakistan may have averted the economic crisis for the time-being, but it will have to boost its exports in months ahead as Islamabad faces the largest trade deficit with China. Pakistan’s annual trade deficit with China stands at more than $14 billion. Without minimising it, the country will not be able to overcome its recurring current account deficit.