The Debt Trap’s Jaws Close on Pakistan

The new Pakistani government headed by Imran Khan is being forced by circumstances into an International Monetary Fund bailout in an effort to deal with the country’s worsening economic conditions and rapidly falling foreign exchange reserves, at least partly because of the enormous cost of indebtedness over the China Pakistan Economic Corridor, which has beggared the country. Forex reserves have hit a record low of US $8.4 billion.

But the cost of this bailout isn't just monetary. It is also going to involve some crucial foreign policy turns and maneuvers, if not big changes overall. If anything, it is a cautionary tale for every other country that finds itself a prospective host to Chinese government officials touting their Belt and Road Initiative. It has beggared Pakistan.

The US government has already said it won’t let IMF money be used to repay Chinese loans, putting Imran’s Tehreek-i-Insaf (Pakistan Justice Movement) government in a precarious position vis-à-vis both the US and China, creating a serious diplomatic challenge at a time when the US and China are themselves interlocked in a grisly trade war. For another, since Pakistan has tapped out its loans from China, the IMF has become the only viable life preserver. That means Islamabad will have to revisit its policy vis-à-vis the US ‘war on terror’ in Afghanistan to first secure the bailout package and maintain cordial relations.

As such, Imran Khan’s promise to get Pakistan out of this economic meltdown notwithstanding, the fact that Pakistan has been forced to go to the IMF for the 13th time in the past three decades signifies that for an economy saddled with loans from China, the Asian Development Bank, the World Bank and the IMF, getting out of this mess is going to take a lot more than just the five years of Khan’s government.

Notwithstanding how Pakistan’s participation in CPEC has partly led to a depletion of reserves, the decision to seek an IMF package has certainly damaged Imran Khan’s populist agenda, which included creating 10 million jobs, turning Pakistan into an “Islamic welfare state” and constructing 5 million homes.

With the IMF’s expected relatively tougher conditions, Khan’s government might end up being forced to do the exact opposite of what he had promised his millions of voters. He might have to privatize the country’s white elephants such as its steel mill and Pakistan International Airlines. If Pakistan does privatize, this would mean the privatized steel mill and PIA will not create jobs but cut down the current number of employees massively, which means a political backlash at home and a lot of space for Khan’s powerful opposition parties to campaign against a leader who, before coming into power, was a staunch opponent of going to the IMF and “begging for money.”

That there will be massive backlash is evident from the way the government’s announcement to seek an IMF bailout package led to an immediate devaluation of the rupee against the US dollar by Rs10 in a single day. Before the announcement, the dollar in Pakistan was trading at 125 rupees to US$1, and the US dollar has since zoomed to 135. The devaluation has increased Pakistan’s debt by RS 900 billion (US$6.75 billion).

However, while Khan may be able to convince his voters of the temporary necessity of going to the IMF, he will not be able to do so with the US government, which believes, as US State Department spokeswoman Heather Nauert told reporters recently, that Chinese loans are partly responsible for creating the chaotic economic situation in Pakistan and that this is a situation that they “have been tracking fairly closely.”

The IMF is in full agreement with the US on how the Chinese factor is depleting the Pakistani economy. Addressing a news conference at the IMF-World Bank annual meetings in Bali, the IMF’s Maurice Obstfeld cautioned that Pakistan’s partnership with China would benefit Pakistan only when Pakistan enters into such projects with China wherein solid and excessive debts are not involved which Pakistan cannot repay. But then this is what the whole CPEC project is: a massive debt trap.

The IMF has accordingly started to emphasize inducing greater transparency on Pakistan’s debts, many of which are owed to China. China, therefore, has now not only got to worry about Pakistan’s decision to seek IMF bailout but also the possibility of Khan’s government eventually seeking to review the CPEC.

While Imran Khan’s government has not yet shown any real intention of reviewing CPEC thoroughly, it has certainly become a bit more cautious in terms of financing projects that may not serve Pakistan’s interests immediately. This has already led the government to cut the size of the biggest Chinese project in Pakistan, a reconstruction of the main rail line between the port city of Karachi and Peshawar by US$2 billion. The obvious reason is the government’s increasing concern with the country’s rising debt levels and increasing dependence on China.

Accordingly, another challenge for Khan, to ensure absolute transparency, is to disclose not only the debt it owes to China but also all the terms and conditions of the CPEC project. This was made clear by the Fund’s managing director Christine Lagarde when she said that they needed to know the exact position and nature of all of Pakistan’s debt, including lending from sovereign governments and from state-owned enterprises so that officials can determine the country’s debt sustainability.

Thus the price is that Pakistan is going to have to pay for a package isn’t just monetary. It is going to involve many policy compromises, a political and economic backlash, and important disclosures.

But the crucial question is: will the IMF’s re-entry in Pakistan’s economy and its willingness to help Islamabad out of China’s debt trap serve to enlighten the country’s political elite of the ‘not-so-win-win’ face of China’s Belt & Road Initiative?

The time for rethinking the CPEC has never been as appropriate than it is now. But will Khan take this step, a step that would invoke serious opposition and even risk his position?

Salman Rafi Sheikh, a Pakistani academic, is a longtime contributor to Asia Sentinel