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China Came To Pakistan’s Rescue Once Again: Here’s How?

Last Updated on June 5, 2023 by Mavia

According to a story published on Thursday by the Financial Times, Pakistan is looking to China to help it roll over more than $2 billion in debt that is due next month as it struggles to obtain the crucial loan from the International Monetary Fund (IMF).

Islamabad is still thinking of methods to meet other repayment deadlines, though, since the nation has around $3.7 billion in foreign debt due this month and in June, compared to its $4.3 billion in current foreign exchange reserves.

Two high-ranking officials informed the publication that Beijing has promised to provide new funds as soon as Pakistan makes its two critical debt repayments, totaling $2.3 billion, in June.

“The refinancing of the commercial loans worth $1.3 billion and a $1 billion loan from the Chinese government would help Pakistan avert immediate default,” the officials claimed.

China Came To Pakistan's Rescue

China Came To Pakistan’s Rescue Once Again: Here’s How?

It should be remembered that China has extended some loans to Pakistan earlier this year, and on a visit to Pakistan earlier this month, Chinese Foreign Minister Qin Gang reaffirmed Beijing’s financial support for the nation. A request for comment on the most recent events received no response from the Chinese government.

Analysts cautioned against the possibility of a default and stated that they anticipated China, one of Pakistan’s closest friends, to provide help.

In reference to the June debt deadlines, Uzair Younus, head of the Pakistan Initiative at the Atlantic Council, a Washington-based think tank, said, “There’s no way that the Chinese…will walk back from Pakistan at this time.”

However, Younus went on to say that a serious lack of outside funding had caused “an economic shock going through the entire society.”

Pakistan is mired in one of the worst economic crises in its history and has long relied on lenders like the IMF and China to finance its budget deficits.

China Came To Pakistan's Rescue

Due to acute import shortages brought on by declining foreign exchange reserves, which can now only cover about a month’s worth of imports, inflation has reached record levels. In April, the consumer price index reached 36%.

According to data made public by the State Bank of Pakistan (SBP), the amount of foreign debt has increased by more than 120 billion dollars since 2015.

Rising commodity import costs, borrowing for projects like those included in China’s Belt and Road infrastructure initiative, and the COVID-19 pandemic’s aftermath have all contributed to the rise.

The officials also told the newspaper that they anticipated receiving up to $400 million from overseas donors as a result of pledges to pay for the recovery from last year’s devastating storms.

The poor country has been pleading with the IMF to restart the initiative, which economists have described as an essential step in improving the economy.

Analysts contend that an agreement with the IMF is essential for regaining investor confidence and would facilitate additional funding from other nations, like Saudi Arabia and the United Arab Emirates.

Officials estimate that Pakistan must pay back around $25 billion in debt in the fiscal year that begins in July; they continue, “If Pakistan is to avoid default, it will likely need additional borrowing and possibly a new IMF program.”

“The circumstance is really delicate. According to former finance minister Hafiz Pasha, we are in the worst financial situation in our country’s history in terms of the sustainability of the balance of payments. “This time, we’ll need a longer IMF agreement to restructure and reprofiling our debt.”

However, Pakistan’s political instability runs the risk of stifling any opportunity for an economic recovery. Imran Khan, the former prime minister who was ousted from office by a no-confidence vote in April of last year, and Sharif’s cabinet are engaged in a standoff.

Before the next national elections in October, analysts believe Khan to be the most well-liked contender. After being detained earlier this month on what he deems baseless corruption charges, the chairman of the Pakistan Tehreek-e-Insaf (PTI) is now out on bail. Following violent rallies by Khan’s supporters while he was being held in detention, authorities initiated a crackdown on his party.

Foreign authorities have cautioned that Pakistan’s political unpredictability runs the risk of deterring it from addressing its economic issues. China’s Qin urged Pakistani leaders to “uphold stability… so that [they] can focus on growing the economy” while he was in Islamabad.

China Came To Pakistan's Rescue

“A prerequisite to general stability is political stability. The hopeful scenario, according to Ali Farid Khwaja, CEO of Karachi-based brokerage KTrade Securities, is that Pakistan would have political stability within the next three months. “A default scenario looks more likely if they can’t deliver on political stability.”

Miftah Ismail, a seasoned industrialist and former finance minister, emphasized the importance of extensive economic reform.

He stated that “Pakistan’s viability at this point depends on the generosity of its friends.” To impress the outside world, radical solutions must be adopted to expand the revenue base and cut spending.

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