Financing from China more likely for Pakistan than IMF: EIU

Pakistan’s incoming government, in the coming days, will need to immediately decide on the course of action that it will be taking with regard to tackling the impending balance of payments crisis.

The country can either rely on China, its all weather friend that has in recent times intensified its economic partnership with its neighbor, or go with the option that Pakistan has been using for several decades now, namely borrowing from the International Monetary Fund.

While both options come with their own costs and benefits, according to the Economist Intelligence Unit, it is more likely that China would play a key role in providing financing to the country and is likely to come out as the core external financier for the nation, despite concerns about the country’s repayment capacity.

According to media reports, China, though a combination of commercial and bilateral loans, has already lent $7.4 billion to Pakistan during the past 13 months, including the most recent $2 billion loan to Pakistan.

As per its analysis, China has the primary incentive of continuing to demonstrate to the world that the Belt and Road Initiative is a success. Since CPEC is a key component of Chinese President Xi Jinping’s signature foreign-policy endeavor, it is in China’s interests to come to Pakistan’s aid, as it has done with other troubled partners like Venezuela.

In return, Pakistan would probably have to grant greater market access to Chinese firms, which could result in greater Chinese ownership in various CPEC projects, besides giving up stakes in strategic national assets, says the Economist Intelligence Unit. “Some other public assets, such as the struggling flag carrier, Pakistan International Airlines, could also be sold to, or taken over by, Chinese enterprises,” it predicts.

In addition to that, “China could also seek to make new military agreements with Pakistan, perhaps securing permission to contruct a base for its naval forces at Gwadar port on the Arabian Sea.”

The cost of borrowing from China in place of IMF would however bring the benefit of a greater degree of fiscal and monetary autonomy to the nation, which would be most preferred by the incoming government to support its promises of mass reforms.

Most reform promises made by the incoming government would require additional spending, which is why the option of IMF is likely to be the least preferable by the incoming government. If Pakistan chose to borrow from the IMF, the government would be required to make significant cuts to it spending, which will not only affect the social services that the government plans on improving, but also infrastructure projects, in turn affecting CPEC related projects, besides ultimately reducing economic growth as well. In addition to that, withholding taxes could be increased, while privatization would also come out as one of the conditions of loans from the Fund.

In order to avoid the costs associated with borrowings from the Fund, which is less likely to be accommodative anyway due to pressure from the United States, it will be mutually beneficial for both Pakistan and China to work together on the financing issue. China seeks to avoid disclosures that Pakistan could be required to make on the terms of financing of CPEC related projects, which makes it ever more likely that it would come to Pakistan’s rescue.

The Economist Intelligence Unit also predicts that instead of cutting spending to close the external-payments gap, it is more likely that the incoming government would try to restrict imports. If it does that, it would ease some of the downward pressure on the currency. “We currently expect the Pakistan rupee’s value to average PKR 118.5 per US dollar this year,” it said.

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Posted on: 2018-08-15T14:24:00+05:00