De-Coupling US Concerns Regarding China Loans and IMF Bailout

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Loans given by China to Pakistan has a 30-year length and a five-year grace period, meaning there would be no repayments for the first five years; and for the next five years, Pakistan’s total annual debt repayments and profit expatriation by Chinese companies would be below $1 billion until 2023.

AUG 2, 2018 (BE2C2 Report): In what could be its 13th IMF bailout, Pakistan is reportedly drawing up plans to seek up to $12B – its largest ever rescue from the fund as debt is soaring, the current-account deficit is widening, reserves are falling and the currency has been devalued four times in just eight months.

But reports say senior finance officials are set to present several options — not just IMF — to Imran Khan, soon after he takes office as Prime Minister mid-month.

Any loan from the IMF, which officials and many observers believe (according to Bloomberg) would be necessary to resolve the country’s escalating foreign reserves crisis, would see the IMF impose restrictions on government’s public spending — both developmental and non-developmental.

Khan’s victory which is pegged on anti regulation, anti corruption and pro business stance however complements multilateral lending institutions longstanding demand for structural reforms such as but not limited to privatizing sick state enterprises, broadening tax base, plugging holes which facilitate informal albeit black economy and generating revenues in all sectors. These could be the biggest giveaways-takeaways though on the table if and when Khan’s team negotiates with the IMF.

Alternatively, China, Turkey and or some Middle Eastern countries could step in and fill IMF shoes if the US plays hardball –given its influence in the lending institution –and if Pakistan decides to seek options, some experts say.

Asad Umar, widely tipped to become the new finance minister, told Reuters last month that Khan’s government would not rule out either Chinese or IMF support.

Options are said to be open vis-a-vis IMF amid reports the US may seek to weigh in on the matter as part of its managing the growing Chinese influence in the region.

The US has been concerned that China is saddling smaller countries with debt as a way to gain influence and control in the region and around the globe.

This week, US Secretary of State Mike Pompeo warned against any IMF bailout that helps Pakistan payoff China loans related to the %62 billion China Pakistan Economic Corridor (CPEC). Pakistan has vowed that ‘third parties’ cannot weaken its resolve as it undertakes its biggest infrastructure and energy development plan with the help of Beijing.

The CPEC, one of Beijing’s undertakings in its aggressive Belt and Road Initiative (BRI), has seen China extend billions of dollars in loans and investments to Pakistan and being its flagship project would insure no hiccups which could create short-term and long-term issues.

For Khan and his team, the immediate challenge however is to manage the financial crisis without letting it become a geopolitical hot potato.

Pompeo said the US looked forward to engagement with Pakistan’s expected new prime minister, but said there was “no rationale” for a bailout that pays off Chinese loans to Pakistan.

“Make no mistake. We will be watching what the IMF does,” Pompeo said in an interview with CNBC television. “There’s no rationale for IMF tax dollars, and associated with that American dollars that are part of the IMF funding, for those to go to bail out Chinese bondholders or China itself,” Pompeo said.

Pakistan has dismissed Pompeo’s concerns that any new bailout would be used to repay Chinese debt terming it as “totally wrong”.

The finance ministry sought to de-couple the link between any potential IMF bailout and Beijing’s loans for the CPEC and said, “Third parties cannot weaken our collective resolve to make CPEC a success story.”

China has also sought to allay concerns — besides the US (16%) and Japan (6%), China is also part (6%) of the IMF lending platform.

On Tuesday, Chinese Foreign Ministry spokesman Geng Shuang commented on the bailout matter saying the IMF had its own standards and operating rules when cooperating with countries.

“I believe they will handle it appropriately,” he told reporters, without elaborating.

The IMF has also distanced itself from Pompeo’s statement and said it remained committed to helping Pakistan.

“The IMF remains committed to helping Pakistan and its people,” said Teresa Daban Sanchez, the IMF resident representative to Pakistan, while responding to Pompeo’s statement. The IMF is a multilateral international financial institution guided by a strong consensus-based decision-making process in its executive board, she added.

However, Sanchez said that the IMF has not received a request for financial support from Pakistan. Last week, China announced $2 billion lending package for Islamabad –a move meant to arrest the sliding official foreign currency reserves and provide much-needed breathing space to the new government.

Sources in the Ministry of Finance and the State Bank of Pakistan (SBP) said over $1 billion has already been transferred to the SBP accounts this week, and would reflect in the reserves’ data to be released on August 2, according to the Express Tribune. The amount will push SBP-held foreign currency reserves past $10 billion, the report said.


This week also, Miftah Ismail, the country’s finance minister in the previous government until late May, clarified the confusion on type and magnitude of on Chinese loans –after Pompeo’s statement linking them with IMF bailout for Pakistan — saying the Chinese debt repayments were nowhere near as big as Western nations imagine.

He told Reuters that ministry of finance calculations showed that for the next five years, Pakistan’s total annual debt repayments and profit expatriation by Chinese companies would be below $1 billion.

“All of those things combined will not go to $1 billion up until 2023,” he said.

Ismail added loans given by China to Pakistan had a 30-year length and a five-year grace period, meaning there were no repayments for the first five years.

The lending was a combination of zero-interest debt, concessionary and some market rate loans, Ismail said, adding that the “weighted average” interest rate for these loans was 2 percent

“These are not loans that will break our back,” he said.

Ismail said the problems hitting Pakistan’s economy were not linked to debt but rather to current account problems, which was not China’s fault.

Pakistan’s finance ministry said it was engaged in “technical discussions” with the IMF but the interim caretaker government did not have a mandate to decide on any IMF package, which will be down to the new administration.

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