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International Relations

Pakistan's Khan faces tough choice: Help from IMF or China

Whoever provides financial support, spending cuts and tax hikes lie in wait

Pakistan’s new Prime Minister Imran Khan will have to choose whether to turn to the International Monetary Fund or to China for financial support.(Getty Image)   © Not selection

NEW DELHI -- Soon after next week's inauguration, a tough decision awaits Pakistan's new Prime Minister Imran Khan, as he will have to choose whether to turn to the International Monetary Fund or to China for financial support to rescue the country from its balance of payments crisis.

But the decision will be difficult for the former cricket star, as assistance from either camp will likely mean the prime minister will have to break his election campaign promises.

"We need to take this decision in a matter of weeks, not months," Asad Umar, who is expected to take the post of finance minister in the Khan administration, told foreign media and diplomats last week.

Umar mentioned three options for financial assistance: the IMF; "bilateral arrangements from friendly countries"; or "going into the commercial market and specially targeting overseas Pakistanis."

Pakistan is currently faced with plunging foreign exchange reserves due to swelling international payments, reflecting a sharp increase in imports through infrastructure projects related to China's Belt and Road Initiative and the redemption of external debt.

The country has seen its foreign currency reserves halve in 20 months. As of July 27, the outstanding balance of reserves stood at $10.3 billion, a critical level equivalent to two months of imports.

Pakistan has no choice but to increase its foreign exchange reserves to avoid a default. In June 2013 when the previous administration of Nawaz Sharif was formed, Pakistan also had foreign currency reserves worth two months of imports and asked the IMF for emergency financial assistance.

The incoming administration is widely expected to do the same and seek support from the Washington-based financial institution.

"IMF support is urgently needed to help stabilize Pakistan's precarious external position," Capital Economics, a London-based think tank, wrote in a recent memo.

In order to receive support from the IMF, the Pakistani government will have to not only step up efforts to increase foreign currency reserves but also resort to unpopular policy measures such as spending cuts and tax hikes.

Asking the IMF for financial assistance will likely force the Khan administration to implement painful reforms, which would ignite public discontent.

In the general election on July 25, Pakistan Tehreek-e-Insaf (the Pakistan Movement for Justice), a political party headed by Khan, quadrupled its number of seats in parliament from the previous election. The party pledged to develop Pakistan into an "Islamic welfare state." But that campaign pledge is likely to be broken if the country asks the IMF for assistance.

The second source of support that Umar mentioned -- "friendly countries" -- has been widely taken to mean China.

Pakistan has been increasing its economic dependence on China over the past several years. One example of this is the China-Pakistan Economic Corridor, a symbolic project of China's Belt and Road Initiative. The corridor, which envisions the construction of roads, ports and other large-scale infrastructure across Pakistan, is estimated to cost $62 billion and is mostly being financed by China.

Financial assistance from China is accelerating. The caretaker government, which is handling government affairs until the Khan administration takes office, received loans worth between $1 billion and $2 billion from China in late July. These raised the country's foreign currency reserves by $1.3 billion over one week, from $9 billion on July 20. Pakistan also borrowed $5 billion from China in fiscal 2018 through June.

Gwadar port in Pakistan, part of the China Pakistan Economic Corridor infrastructure development initiative which has seen Pakistan's economic dependence on China increase over recent years.    © Reuters

Despite Pakistan's growing reliance on China, Umar has shown no signs of concern -- at least officially. "I don't think it is dangerous for the country... The dangerous part is not what we are getting under CPEC and from China," the incoming finance minister said recently.

Most experts do not expect China will imprudently continue financial assistance. "We do not expect China will provide a lump sum to cover the entire external financing gap," Oxford Economics, a U.K.-based research group, said in a recent report. "The promised 'Islamic welfare state' will need to be pared back until the imminent external financing crisis eases."

China, which has been seeking to secure interests in strategic strongpoints along its so-called new Silk Road via the Belt and Road Initiative, has already won the right to manage Gwadar Port in southwestern Pakistan. It also acquired management rights over the Port of Hambantota in southern Sri Lanka at the end of 2017.

But the two deals, which were reportedly valued respectively in the tens of millions of dollars and $1.1 billion, were small in comparison with Pakistan's current shortage of foreign exchange reserves.

If China concludes that its financial assistance to Pakistan is not cost-effective, it may come up with similarly tough demands for Pakistan's spending cuts as the IMF is expected to do.

Whichever source of financial assistance Khan chooses, a difficult reality lies ahead for the new prime minister.

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