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Politics

US lawmakers balk at Pakistan rescue, fearing money going to China

IMF bailout would be used to repay debts to Beijing, congressmen say

Experts say the government of Prime Minister Imran Khan of Pakistan needs to manage the Chinese "debt trap" issue in order to avoid future economic problems. (Nikkei Montage)

QUETTA, Pakistan -- Pakistan could face renewed hurdles in receiving a bailout package from the International Monetary Fund after three members of the U.S. Congress voiced their disapproval, saying the loans would be used to repay debts to China.

The trio wrote a letter, dated April 5, to U.S. Secretary of State Mike Pompeo and Treasury Secretary Steven Mnuchin to oppose a bailout for Pakistan. The development comes as a Pakistani delegation is visiting Washington to negotiate a deal with the international lending agency.

The three U.S. lawmakers, all of whom are members of the House of Representatives, expressed deep concerns over Pakistan's attempt to seek funds from the IMF in order to repay "predatory Chinese loans." They conveyed the fear that Pakistan could end up handing over its assets to China, just as Sri Lanka handed over the $1.5 billion Hambantota Port to China, and said the U.S. should counter China's attempts to hold Pakistan in a "debt trap."

Pakistan has seen its foreign exchange reserves plunge in recent years due to ballooning international payments, partly reflecting the previous government's spending on infrastructure projects under China's Belt and Road Initiative. The $62 billion China-Pakistan Economic Corridor, or CPEC, is a flagship project in the initiative.

Pakistani officials have said that any IMF bailout package would not be used to repay loans from China, but many experts are skeptical of that claim.

Michael Kugelman, deputy director of the Asia Program at the Wilson Center in Washington, noted that the contents of the letter represent the preferred policy of a segment of Washington politicians, who do not want to see a bailout approved without pressing for Pakistan's cooperation in the Afghan peace process.

"The demands in the letter are in line with the desire among many on Capitol Hill to take a harder line on Pakistan," Kugelman told the Nikkei Asian Review.

A view outside the Lahore railway station. The International Monetary Fund expects Pakistan’s economy to grow just 2.9% in the current fiscal year and 2.5% by 2024 unless drastic measures are taken.   © Getty Images

Negotiations between Pakistan and the IMF have faced a rough patch over the past six months. Pakistani Finance Ministry officials have repeatedly said they are near to striking a deal with the IMF, but each time those claims were followed by revelations that negotiations were continuing.

A major issue in the talks is the tax collection targets for the upcoming fiscal year. The IMF wants Pakistan to set a tax collection target of 13% of gross domestic product, which would be difficult to achieve. An IMF team will visit Pakistan at the end of this month with the expectation of finalizing a deal.

While the U.S., like all IMF members, does not have veto power at the agency, is has the largest voting share -- 16.52% -- among member countries on the board.

Experts believe that the letter from the congressmen -- Rep. Ted Yoho, Republican of Florida; Rep. George Holding, Republican of North Carolina; and Rep. Ami Bera, Democrat of California -- could be used as a pretext by the U.S. to oppose a bailout. That means Washington, with the support of its allies, could attempt to block a deal even if there is an agreement between Pakistan and the IMF at the end of this month. Other IMF member countries have not yet weighed in on the issue.

The letter's demands have not yet translated into official U.S. policy, although Pompeo has previously warned that any bailout should not include funds to repay Chinese loans.

Kugelman believes that the letter by itself could not compel the U.S. to block a bailout, but he added that the situation could change if the letter's sentiment gains attention in Washington. "If [the letter] gets enough traction within senior levels of government, however, then it could serve as an impetus to block an IMF deal," he said.

Hasaan Khawar, a public policy analyst in Islamabad, called the letter a "pressure tactic," saying that its claims do not make sense. Khawar said that IMF loans would be only one of multiple foreign-currency inflows to Pakistan, in addition to remittances, exports and other loans. "How can [the U.S. or the IMF] prove that loans borrowed by Pakistan specifically from IMF will be used to repay Chinese loans," he said.

Recent reports by the IMF, World Bank and Asian Development Bank paint a bleak picture of Pakistan's economy. The IMF, for example, expects GDP growth of 2.9% for the current fiscal year ending in June and 2.5% by 2024 if drastic measures are not taken. The economy expanded more than 5% for each of the two previous years. Meanwhile, the Pakistan Bureau of Statistics says annual inflation is 9.41%, the highest in five years.

Dr. Hafeez Pasha, a former finance minister of Pakistan, noted in a recent interview with local media that Pakistan is currently undergoing stagflation -- a combination of high inflation and weak economic growth.

Pasha said that would push four million people below the poverty line and push more than a million into unemployment. He said there would be catastrophic consequences for the economy if the U.S. blocks a bailout.

Some analysts believe that Washington ultimately will support a bailout package. Kugelman noted that Washington's chief interest is stability in Pakistan, while Khawar said the country is an important ally because of its role in the Afghan peace process. Khawar added that Chinese loans would be used as a pretext to pressure Pakistan but would not be used to block a bailout.

Still, Chinese debt trap fears continue to haunt Pakistan. Experts say the government of Prime Minister Imran Khan needs to manage the issue to avoid future economic problems.

"The only ways forward are to either stop taking Chinese loans, which is unlikely, or to push for existing and future CPEC contracts to be renegotiated with loan terms more favorable for Pakistan," Kugelman said.

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