The limits of Chinese cash

For India, what are the implications of Pakistan having to turn to the IMF again?

Over the past quarter of a century, Pakistan has been forced to go to the International Monetary Fund at least half a dozen times. Ahead of the ongoing annual meetings of the Fund and the World Bank in Indonesia, the finance minister in Imran Khan’s new Pakistan Tehreek-e-Insaf (PTI) government has accepted that, once again, the country needs a bailout from the IMF. This is in spite of the fact that the Pakistan government still has billions outstanding from an IMF programme earlier this decade.

Mr Khan made a well-publicised trip to Saudi Arabia shortly after his swearing in. It was widely interpreted as him seeking funds to tide over Pakistan’s balance of payments crisis from what was long its most stalwart ally in the Gulf. But the days in which Saudi Arabia viewed Pakistan as a reliable vassal and mercenary are clearly over — something not unrelated to the Pakistan military’s refusal to join the Saudi-led war in Yemen, and Riyadh’s new independent assertiveness in the Trump era. Now, Mr Khan’s government has had to turn again to the West-controlled IMF — in spite of the fact that he thundered against Western influence in Pakistan for much of his political career.

Troubles in Pakistan’s state finances are nothing new, so why is this particular crisis worth following from India? Because it comes at a time when the conventional wisdom in India is that, first, Chinese influence in India’s periphery is unstoppable; and, second, that Pakistan is inevitably slipping into becoming a client state of Beijing.

Illustration: Ajay Mohanty

The reason that Pakistan’s balance of payments is in trouble is, in fact, directly linked to an increasing dependence on China. The China-Pakistan Economic Corridor, or CPEC — a crucial part of Xi Jinping’s Belt and Road Initiative, or BRI — has been considered by many in Pakistan as being integral to any plans to develop the country’s infrastructure and thus raise productivity domestically. Mr Xi himself has dropped enormous sums into the conversation — $60 billion worth of Chinese investment in Pakistan has been mentioned.

Yet the initial stages of the CPEC have helped create a fragility on Pakistan’s external account. Purchases of machinery, much of it made in China, required for CPEC building plans have swollen Pakistan’s import bills. Meanwhile, Chinese funding has not kept pace in spite of bridge loans of several billion dollars worked out earlier this year. Several CPEC projects have, meanwhile, become controversial domestically following various leaks, suggesting that the terms on which Chinese companies are building them are usurious and extractive.

If Pakistan turns to the IMF, it will find that the organisation is less friendly than it has been in the past. For one, all multilateral agencies that depend upon the United States government to a greater or smaller extent have become more careful about expenditure following Donald Trump’s arrival in the White House. Senior Trump administration officials have already worried that an IMF bailout of Pakistan would amount to US taxpayers subsidising Chinese bond-holders. In addition, any IMF package would involve opening the CPEC books to the Fund’s inspectors. This might officially reveal the terms on which the controversial CPEC projects are being built, with negative political implications for Beijing’s agenda in Pakistan.

The Pakistan military has benefited from the CPEC not just because military-linked agencies hope to profit from the Chinese build-out of infrastructure but also because they see the CPEC as an integral part of the replacement of Washington by Beijing as Rawalpindi’s primary patron. Indian strategy for containing Rawalpindi’s GHQ’s ambitions over the past years has depended not just on disillusionment with the Pakistan establishment in Western capitals but also on careful diplomacy with the Arab world. The problem with this strategy, it seemed, was that Pakistan’s “iron friend” China would be able and willing to take up all the slack. It is this notion that will need to be revisited. It is clear that in spite of Beijing’s tremendous resources it is not in fact yet in the same ballpark as the traditional multilateral agencies like the IMF. When it comes to financing bailouts, Beijing will not help.

India can also congratulate itself that past efforts at various multilateral fora have not been in vain. For example, a major dam project in Gilgit-Baltistan, part of Pakistan-Occupied Kashmir, has become a cause célèbre in Pakistan following a direct appeal from the Supreme Court and the new prime minister for personal contributions to ensure it gets built. Multilateral agencies have not funded the Diamer-Bhasha dam largely because of India’s argument that it is in PoK and thus must not be paid for. Till recently it was hoped in Pakistan that China would step in — but Beijing’s financial terms were so onerous that the $16-billion dam was dropped from the CPEC. Nor can Pakistan’s federal government pay for the dam out of its own resources. Hence the appeal. 

It is likely that decision-makers in Islamabad and Rawalpindi are now in a position where they will be forced to confront the limits of Chinese assistance and rework any strategy based on exclusive ties to Beijing. India may thus have an opportunity to re-invigorate its diplomatic efforts to use Western and Gulf influence in Pakistan to push it towards the path of peace and sustainable development.

More broadly, this is a reminder that Beijing’s ambitions in India’s neighbourhood are not impossible to counter. The People’s Republic will shortly find itself over-stretched. It is also true that there is a contradiction at the heart of the BRI — the countries seeking Chinese investment expect it to come on terms similar to traditional multilateral funding, but the commercial requirements of Chinese firms ensure otherwise. In Malaysia, in Myanmar, in Sri Lanka, and elsewhere these issues have already begun to cause a rethink. While India’s resources are not in the same ballpark as China’s, it is important for New Delhi to realise that if it serves as a facilitator for regional infrastructure investment it will be able to deal with Chinese influence in the neighbourhood on its own terms.

m.s.sharma@gmail.com

Twitter: @mihirssharma