Pakistan plans to seek financial assistance from China and Saudi Arabia to get out of the grave financial crisis it faces to bridge the country’s external account deficit ahead of budgetary proposals for the 2018-19 fiscal year.
A well-placed source in the Ministry of Finance told Asia Times that instead of approaching the International Monetary Funds (IMF) for a bailout, officials have proposed that the government ask wealthy friends such as China and Saudi Arabia to help Pakistan overcome its dire economic situation.
Prime Minister’s Adviser on Finance Miftah Ismail confirmed last week that the government contacted friendly countries for assistance to get the economy back on track at a time when preparations are already underway for budget proposals for the next fiscal year.
“If I am not wrong the country had to repay foreign loans worth US$6 billion by the 31st of March this year, which it could not do due to the external account deficit and fast depleting foreign-exchange reserves,” Imran Khan’s chief political advisor and a former Pakistan Tehrik-e-Insaaf (PTI) Punjab president, Ejaz Ahmed Chaudhary told Asia Times. Alluding to former finance minister Ishaq Dar, he said ‘Dar’s doctrine’ had landed the country in a serious debt trap, because “from July 2013 to the end of 2017, they contracted foreign loans worth $40 billion, which is now a huge burden on the economy,” Chaudhary claimed.
IMF ‘bailout would threaten Chinese Corridor’
“An IMF package would put the China-Pakistan Economic Corridor (CPEC) – a $60-billion lifeline – at stake because the IMF does not approve of the project in view of the poor health of the economy,” a source at the Finance Ministry said. He said economic managers were at their wit’s end on how to bridge the yawning resource gap in the external account and avoid going into default on repayment of the country’s debts.
The shortfall of over $14 billion in external resources, he said, needed to be bridged through financial contributions from China and Saudi Arabia and initial proposals had already been sent explaining that, the source at the ministry said.
“We expect $8 billion worth of ‘parking money’ [loans] from China, who have also been asked to allow payment of CPEC related import proceeds in Pakistani currency instead of US dollars to release pressure on the foreign exchange reserves of the country. The ministry also proposed imports of oil from Saudi Arabia on a deferred payment mechanism. The Saudis have extended this facility to Pakistan in the past and the government is hopeful that they will help the country again and keep cordial relations between our two countries.”
However, Dr Farrukh Saleem, an economist, financial analyst and industrialist based in Islamabad, told Asia Times, “It’s true that Pakistan is facing a widening gap in export/import portfolios but the country has enough foreign exchange reserves to foot the external payment of $4-5 billion as the State Bank and commercial banks’ reserves stand at $18 billion.”
He said default was a technical term and judging by its repayment capacity, Pakistan had not crossed the “red line” to get into default.
Dr Saleem said Pakistan needed $15-16 billion worth of support but the World Bank, Islamic Development Bank and bilateral credit from a consortium of donors would raise more than half – $9 billion. “We will be left with a shortfall of around $7-8 billion to bridge either through grants and assistance from friendly countries or from the IMF,” he said, adding that the country’s economy was, of course, passing through a difficult period.
China and Pakistan had signed a swap agreement, which could allow imports to be paid for with local currency. But the request for a huge loan of $8 billion for Pakistan’s Central Bank could be a tough one, as China has already been wary about the fate of its CPEC investment given political uncertainty in the country.
“China will have to meet Pakistan’s demand because if they refuse, Pakistan will approach the IMF for a bailout package and if that happened the smooth sailing of the CPEC would become extremely difficult – a scenario which Chinese would not like to see,” Chaudhary remarked. He said the ‘Chinese Corridor’ was a huge project but sadly, even members of the national parliament did not have widespread agreement on the mega-deal.