When China announced its Belt and Road Initiative, Pakistan became an enthusiastic early supporter. In London, where I live, I saw double-decker buses carrying proud advertisements publicizing Pakistan’s close ties with China, and how the China Pakistan Economic Corridor (Cpec) would transform Pakistan’s economy. With China extending its largesse across Asia, Africa and beyond, it seemed that countries like India, which were wisely circumspect of China’s investment forays, were getting left out of the party.
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But Pakistan is not alone in realizing that there is no such thing as a free lunch. Pakistan’s budgetary processes have been notoriously opaque, but to avoid a financial crisis, it needs a substantial infusion of assistance. It is a truth universally acknowledged that when a country faces a potential financial crisis, it has little choice but to turn to international financial institutions such as the International Monetary Fund (IMF). Countries kick and scream, but they have to comply.
That, however, poses problems. If you let the IMF in, you have to let in its economists, who will want to examine your books of accounts closely, and they will have sound, if sober, advice which asks the borrowing country to learn to live within its means. That would mean cutting wasteful expenditure while maintaining social safety nets, but also ending profligate flagship projects which don’t make economic sense, because the decision to invest in them has been made not based on sound cash flow analysis, but political exigency.
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I recall my time as an economics correspondent in South-East Asia in the 1990s, when country after country that had invested in white elephant projects—private debt-funded shopping malls, golf courses, office complexes and condominiums—was unable to generate the cash flow to service its loans, bringing the East Asian economic ‘miracle’ to a screeching halt. It also led to political upheavals, most spectacularly in the form of Suharto’s removal as president of Indonesia.
The choice for Khan is simple: Either he has to suspend some of the projects planned under Cpec, or get ensnared further in the grip of the Chinese dragon. At the end of July, Pakistan’s foreign reserves stood at a little over $10 billion, which can pay for about seven to eight weeks of imports. With debt repayments mounting, Pakistan needs urgent infusion to ensure that it has enough foreign reserves to avoid a potential default.
This assumes that Pakistan’s publicly available debt figures are accurate. Much of the financing of Cpec is relatively opaque (its overall cost may exceed $60 billion). If Pakistan were to go to the IMF, the Fund would want far more clarity and transparency than is currently available of the terms on which China has funded the projects. As US secretary of state Mike Pompeo said categorically, American tax dollars should not be used to bail out Chinese entities that may have lent recklessly to Pakistan (and other countries), influenced by political considerations rather than economic rationale.
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While those who champion China’s investment push in the developing world claim that the country is driven by altruistic motives, the crucial difference between Chinese investments now and the erstwhile Marshall Plan, which the Americans provided to rebuild Europe after World War II, is this: Much of the American assistance came in the form of grants; the Chinese assistance is in the form of loans which, when not serviced, can turn into equity, as Sri Lanka has now learnt. Its Hambantota port had to be leased to the Chinese for 99 years after Sri Lanka found it difficult to service a loan. Not surprisingly, Malaysia’s Prime Minister Mahathir Mohamad, always sceptical of foreign capital, has put Chinese investments worth nearly $20 billion on hold. Myanmar did the same with the Myitsone dam some years ago, ostensibly on environmental grounds. In other countries too, there have been protests against Chinese investments.
If the IMF does get involved, it will ask Pakistan to be open about the terms of Chinese borrowings, and may even suggest some projects be shelved. Would the flagship Gwadar port project meet the same fate as Hambantota?
For Khan, the decision should be as easy as putting the opposition in to bat on a misty morning with dew on the wicket and the new ball in his hands. But Khan is a maverick politician difficult to place in a slot. With an unpredictable White House that may not write cheques easily for Pakistan, Xi Jinping’s China may provide a semblance of stability to Pakistan, because bonhomie with Navjot Singh Sidhu notwithstanding, rivalry with India is a matter of utmost priority for any Pakistani leader, and, more importantly, the army.
Khan can turn the situation to his advantage by making the terms of earlier deals with China public, let public anger be directed against his predecessors, and bask in glory. It would undoubtedly make his job harder—the ‘easy money’ Pakistan may have expected from China won’t materialize. But there is some truth in the adage—beware of strangers bearing gifts.
Salil Tripathi is a writer based in London.
Comments are welcome at email@example.com. Read Salil’s previous Mint columns at www.livemint.com/saliltripathi