Embattled Pakistan gets US$700 million China surprise, but threat of 'lost decade' remains

China has thrown financially floundering Pakistan a US$700 million lifeline amid critical negotiations with the International Monetary Fund (IMF), with a further US$1.3 billion in new loans potentially on the horizon to boost the foreign exchange reserves of Beijing's close strategic ally.

Prime Minister Shehbaz Sharif welcomed the unexpected funding by China Development Bank on Friday, saying it had not been anticipated until the IMF released a delayed US$1.2 billion tranche, possibly some time this month.

An "allied nation a few days ago conveyed to us that 'we are giving you this straight away', and these things can never be forgotten", Sharif said.

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The US$700 million loan buoyed Pakistan's central bank forex reserves up to nearly US$4 billion, which is just shy of a month's worth of imports.

Delays in an agreement with the IMF prompted Moody's rating agency to downgrade Pakistan's long-term foreign debt rating by two notches to a historic low of Caa3 on Monday. It also matched the February 14 decision of Fitch Ratings by cutting Pakistan's credit rating to CCC- from CCC+. Both those ratings are just above what would be considered default status.

The hoped-for resumption of IMF funding in March is expected to trigger other billion-dollar inflows of financial help from allies Saudi Arabia and the United Arab Emirates, as well as project funding from multilateral lenders like the World Bank and Asian Development Bank.

But with the nation of 230 million people long subject to poor leadership by elites, former officials and analysts do not expect Pakistan's government to enact the structural reforms needed to rescue it from a potential Sri Lanka-like default.

"Pakistan's economic crisis is of its own making - the inescapable consequence of successive governments living beyond their means and failing to mobilise adequate domestic resources," said Maleeha Lodhi, a former Pakistani ambassador to Britain, the United Nations and the United States.

"History attests to the fact that a narrow oligarchic elite dominates Pakistan's politics and economy, and has long been averse to structural reforms, which is the only way Pakistan can extricate itself from regular financial crises," she said.

Michael Kugelman, director of the South Asia Institute at the Wilson Centre, a Washington-based think tank, said Pakistan's elite often rule out structural reforms "because it is inherently invested in the status quo, and all the benefits that entails for vested interests".

Up to this point, those leaders "haven't had the political spine" to impose changes, he said, which suggests that it "all comes down to the leadership factor".

Ex-ambassador Lodhi said Pakistan needed "a different kind of political leadership to put the country on a path to sustainable economic growth".

Islamabad has in recent weeks bowed to the IMF's demands to reduce its budgetary deficit by increasing taxes on consumption and eliminating subsidies, so as to secure the final tranche of a programme agreed in 2019.

But with Pakistan needing US$35 billion in external financing for each of the next three financial years, starting this July, to cover debt repayments and imports, former officials said more loans would be needed to avoid a default.

"When this programme ends in June, we will probably not have much more than US$10 billion in reserves, if that. That would be about a month-and-a-half of import cover," said former finance minister Miftah Ismail, in a recent television interview.

"Because of the debt repayment we have to do now - about US$20 billion for the foreseeable future - I am pretty sure we will have to have back-to-back IMF programmes," he said, adding that IMF approval for resumed funding would be needed to secure needed loans from the World Bank and Asian Development Bank.

Islamabad opened talks with financial advisory firm Rothschild & Co on February 20, in a move widely seen as a precursor to the restructuring of Pakistan's foreign debts of some US$100 billion, about 30 per cent of which is held by China.

The IMF, however, remains opposed to any debt restructuring.

"Pakistan needs to be able to function as a country and not to get into a dangerous place where its debt needs to be restructured," IMF Managing Director Kristalina Georgieva said, in a February 18 interview with German state broadcaster Deutsche Welle.

She said the Fund is pressing Pakistan to increase revenues by taxing the rich and "moving subsidies only towards the people who really need it".

However, former State Bank of Pakistan deputy governor Murtaza Syed said the country needed immediate debt relief if it was to service its foreign debts and make the fiscal adjustments required by the IMF.

Speaking to Bloomberg TV, he said Pakistan's population would be intolerably burdened by inflation if debt relief was not forthcoming.

About 40 per cent of Pakistan's population live under the World Bank's lower middle-income poverty line of US$3.20 per day in 2021.

The percentage rose an estimated 2.5-4 per cent last year due to the combined impact of August's super floods and rampant inflation, which thrust as many as 9 million more people into poverty.

"If this issue is not resolved, then there will be a lost decade for Pakistan," Syed said.

Consumer price inflation hit an all-time high of 31.6 per cent year-on-year in February, according to figures released on Wednesday by the Pakistan Bureau of Statistics.

It said the recent enactment of IMF conditions last week more than doubled natural gas rates and hiked cigarette prices by more than 75 per cent.

International ratings agencies expect Pakistan's inflation rate to average more than 30 per cent in the first half of 2023.

This article originally appeared on the South China Morning Post (SCMP).

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