Pakistan’s new prime minister Imran Khan took a strong stance on public spending during his election campaign, pledging policies that will benefit the poorest including more spending on education and welfare.
But he’s inherited a problem. Pakistan is suffering a foreign reserve crisis, with the central bank figures showing just $9.5bn reserves as of the end of May, down from $16.4bn in May 2017. It is unlikely Khan has the cash flow to fund these policies.
The problem is so bad mandarins had started putting together a $12bn IMF bailout bid ready for the new prime minister to sign and send before the election results were in, the Financial Times reported. This would be more than twice the sum Pakistan received the last time it went to the IMF and would likely come with a string of concessions including public spending freezes. Pakistan has not gone back to the IMF since it left that programme in 2016.
There is an alternative to IMF money but that too has implications. Khan could choose to double down on Pakistan’s dependence on Chinese money that is pouring in through China-Pakistan Economic Corridor (CPEC), a cornerstone of China’s Belt and Road Initiative (BRI) thought to be worth up to $62bn in investment. So far Pakistan has borrowed around $4bn from China this year alone for various infrastructure projects including railways and roads.
So why not take both IMF and Chinese money? There is a concern within Pakistan that the financial disclosures required by the IMF could lead to the end of the CPEC. “Once the IMF looks at CPEC, they are certain to ask if Pakistan can afford such a large expenditure given our present economic outlook,” a government official told the FT.
The other issue is that the US appears to be trying to use an IMF bailout as a tool to separate Pakistan from its Chinese ally. US secretary of state Mike Pompeo has gone on record calling for the IMF not to give any money to Pakistan that might end up paying off debts to China. “There’s no rationale for IMF tax dollars, and associated with that American dollars that are part of the IMF funding, for those to go to bail out Chinese bondholders or China itself,” he told CNBC.
The US and Pakistan used to be close however the relationship has soured, particularly over the impact America’s war on terror in the region has had. Khan, while not always pro-American, has said he wants to rebuild relationships – whether he can afford to fulfil his education and welfare pledges may end up resting heavily on whether or not he does.
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