Bid for an IMF Bailout Puts Imran Khan in a Cleft Stick

The Imran Khan government’s decision to go for an IMF bailout to rescue Pakistan from a severe financial crisis brought about by reckless external borrowings, has put the new regime in a cleft stick.

On the one hand, the US-led IMF is set to impose its stringent traditional conditions with an additional clause that Islamabad should review, rework and reschedule its burgeoning debt to China.

On the other hand, China has said that, while it is not against a “professional assessment” of Pakistan’s finances by the IMF, it will certainly insist that the IMF’s recommendations do not adversely affect the on-going economic cooperation projects in Pakistan, principally the multi-billion dollar China-Pakistan Economic Corridor (CPEC), which is allegedly the principal cause of Pakistan’s financial woes.

US Pressure on Pakistan

US Secretary of State Mike Pompeo’s has said that the IMF bailout package to Pakistan should not be used by the latter to pay off its debt to China. This was echoed by the State Department Spokesperson Heather Nauert.

And writing in the website of the Centre for Strategic and International Studies, Mark Sobel, a former representative of the US in the IMF said: “While the China-Pakistan Economic Corridor (CPEC) holds forth the prospect of boosting the Pakistani economy, especially if investments are sound, the terms and conditions of much of the lending are opaque, and interest rates on some loans may be higher than Pakistan can afford. The IMF must ensure that its resources are not used to bail out unsustainable Chinese lending for CPEC.”

“The Fund (IMF) needs to have at its fingertips comprehensive data on all CPEC lending - its terms, maturities and parties involved. Chinese lending should be on realistic terms and consistent with Pakistan’s sustainability. Otherwise, China should reschedule or write down its loans, sharply reducing the value of its claims,” Sobel wrote.

It remains to be seen how the Imran regime is going to manage to bring about an equilibrium between these two contesting claims at its meetings with the IMF on November 7 when it is expect to seek a bailout of US$ 6.2 billion.

Domestic Challenge

In the domestic sphere too the regime is set to face a challenge. The IMF will, in all likelihood, insist that the government gets the support of the opposition parties to any package that may be agreed upon, as it had done earlier.

But given the sharply antagonistic relations between the ruling Pakistan Tehreek-e-Insaf (PTI) party and the opposition Pakistan Muslim League (Nawaz) and the Pakistan Peoples’ Party (PPP), Imran Khan will have to marshal all his persuasive skills to sell a package ,which will necessarily be harsh.

The task has become tougher now, given the victories registered by the opposition in the just concluded by-elections to 35 National and Provincial assembly seats.

The PTI had a major upset, as voters in two constituencies, earlier won by Imran Khan, namely NA-131 Lahore and NA-35 Bannu, changed their mind and elected members of the opposition parties.

Extent of External Debt

The IMF has said that Pakistan’s external debt and liabilities now stand at US$ 93 billion. And if the present trend continues, it could mount to US$ 144 billion in the next five years.

The IMF has also estimated that the country’s foreign currency reserves would continue to decline to US$ 7.075 billion by 2023 from $12.09 billion held by the State Bank of Pakistan now.

More alarmingly, the total external debt servicing would reach US$ 19.7 billion by 2023 against US$ 7.739 billion in the Financial Year 2018.

Debt To China

Writing in Express Tribune, Salman Siddiqui has quoted Topline Securities to say that Pakistan will end up paying US$ 90 billion to China over a span of 30 years against the loan and investment portfolio worth US$ 50 billion under CPEC.

“The estimated return on Chinese investments (which is the sum of principal and interest on foreign currency debt and repayment of profits/dividend on equity investment) shows 40% return on investment,” the Topline Securities’ report on CPEC says.

“The amount increased to US$ 54 billion after the inclusion of more projects in CPEC such as investments in Pakistan Railways and financing of the Karachi Circular Railways project. The volume of return would increase accordingly.”

“Infrastructure and power projects – part of the CPEC portfolio and divided across time in terms of priority – are expected to be completed by fiscal year 2030.”

Leading economists have estimated an annual average repayment of US$ 3 to 4 billion per year to China post fiscal year 2020.

Also most CPEC-related projects are being funded abroad and Pakistan is not seeing any significant inflow of foreign exchange.

“It should be noted that project financing for CPEC is being done between Chinese companies and banks and around 25% of CPEC investment is expected to come in Pakistan,” the Topline Securities report said.

However, the report argued that repayment would be manageable given the projected surge in exports and drop in imports. CPEC has also put money in peoples’ pockets by generating 70,000 jobs so far.

China Might Help Out Pakistan

Pakistan’s heavy reliance on China to meet its developmental and strategic needs makes it hard for it to ask Beijing to reschedule or rework its debt repayments.

But eventually, as an “all weather friend”, China might oblige, though only if CPEC is not badly dented. Just as Pakistan cannot do without China, China cannot do without Pakistan. China has a huge financial commitment in CPEC and has a very significant strategic interest in it.

Differences in Perception

The first hurdle to be overcome in the Pakistan-IMF talks is the difference in perception about the nature of Chinese loans.

Pakistan’s Finance Minister Asad Umar told the media after his talks with IMF’s Christine Lagarde in Indonesia, that the State Department’ contentions about Chinese loans are “100% wrong.”

“Pakistan’s financing gap for the current year is about US$ 12 billion and total repayments to China averages US$ 300 million over the next three years,” Umar said.

“The terms of Chinese loans would be placed before parliament and shared with the IMF. We should show how China, a real friend, extended attractive financing to Pakistan for the long term. The Chinese embassy has endorsed this position in a recent tweet,” Umar added.

Former Finance Minister Miftah Ismail told Reuters that the “weighted average interest rate” of Chinese loans is only 2%. “These are not loans that will break our back,” he said.

As per Finance Ministry calculations for the next five years, Pakistan’s total annual debt repayments and profit expatriation by Chinese companies would be below $1 billion, Ismail added.

But in this context, Dawn writer Kurram Hussain asked: “How come the Planning Commission put out a figure closer to US$ 3 billion year or so ago?

Finance Minister Umar denied a statement by his Information Minister Fawad Chaudhry that unacceptable conditions from friends, Saudi Arabia, China and the UAE, had compelled Pakistan to go for the IMF bailout.

“The IMF bailout program was taken with their consultation and there was no condition demanded either by Saudi Arabia, the UAE or China at all,” Umar said.

Pakistan has to go for an IMF bailout because of certain domestic and external factors, the Minister explained.

Foreign exchange reserves dwindled because of the yawning gap between imports (US$ 60 billion) and exports (US$ 25 billion). And the debilitating external factors were the US sanctions on Iran and the trade war with China. This led to an oil price increase and economic uncertainty in the international market. An increase in US interest rates also created unfavorable conditions in the external sector.

Way Out

However, according to Prof. Rashid Amjad of the Lahore School of Economics, a question that should be asked is why 18 IMF programs in the last 30 years, have ended up with an unsustainable fiscal and current account deficit and a run on the country’s foreign exchange reserves.

The blame can be put at the door of the IMF as well as successive Pakistani governments. The IMF’s policies have been politically inconvenient. And there has been continuous economic mismanagement also.

Writing in Dawn, Prof.Amjad suggested that the government draw up a “credible and consistent homegrown economic roadmap, a strategic three-year plan covering the coming years from 2018 to 2021.”

“On the stabilization front, this plan should target a staggered decline in the fiscal deficit from the current expected 7.2 % in 2018-19 (excluding measures in the revised budget) to near 5% over the next three years, supported by steps to gradually reduce subsidies and the adoption of new initiatives to increase tax revenues.”

“ But we must never forget the terrible impact of a sudden steep decline in the fiscal deficit agreed on with the IMF in the 2008 program, which led to a collapse in the growth rate from 5.5% to around 0.7%. A cut in subsidies resulted in food inflation of over 25%. The economy never quite recovered from this,” Prof.Amjad pointed out.

“Most importantly, the strategic plan should be supplemented with the outline of a medium-term development plan that serves as a framework for cuts in development expenditure, shelving or reduction of projects and reallocation of funds for projects including those under CPEC.”

Other countries like Malaysia have cut expensive and non-priority Chinese- funded projects drastically.

“In the negotiations with the IMF, it would be sensible to agree to a 24-36 months, US$ 8-9 billion fund program, frontloaded with the release of a sufficiently large initial tranche to calm the markets and restore business confidence,” Amjad said.

Finance Minister Umar has said that government will see that the IMF’s conditions do not impact on the poor harshly. He pointed out that fuel prices have been differentiated so as not to hit the poor hard. Electricity prices would also be similarly differentiated.