- Pompeo says ‘no rationale for IMF tax dollars to go to bail out Chinese bondholders or China itself’
- China hopes ‘IMF will handle funding for Pakistan properly’
WASHINGTON/LAHORE: United States (US) Secretary of State Mike Pompeo warned on Monday that any potential International Monetary Fund (IMF) bailout for Pakistan’s new government should not provide funds to pay off Chinese lenders.
In an interview to CNBC, Pompeo said that the United States looked forward to engagement with the government of Pakistan’s expected new prime minister, Imran Khan, but said there was “no rationale” for a bailout that pays off Chinese loans to Pakistan.
“Make no mistake, we will be watching what the IMF does,” he said, adding, “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.”
All indicators suggest the Pakistan Tehreek-e-Insaf’s (PTI) government, which is likely to take oath next month, will immediately have to approach the IMF for what would be the country’s 13th bailout from the fund.
“Exports are down, debt is up, the macro indicators are pretty poor,” said Sehar Tariq with the US Institute of Peace.
According to the Financial Times, senior Pakistani finance officials are drawing up options for Imran Khan to seek an IMF bailout of up to $12 billion. In a Reuters report on Tuesday, however, an IMF spokesperson said, “We have so far not received a request for a fund arrangement from Pakistan and we have not had discussions with the authorities about any possible intentions.”
The other option may be further borrowing from China.
Through OBOR’s flagship project China Pakistan Economic Corridor (CPEC), Pakistan has taken numerous loans from its trading partner China, which economists have warned the country will face difficulty in paying back.
CHINA HOPES IMF FUNDING TO PAKISTAN WILL BE HANDLED PROPERLY:
Meanwhile, a spokesman of the Chinese Foreign Ministry, Geng Shuang at a regular news briefing here on Tuesday hoped that matters relating to the IMF’s funding to Pakistan will be handled properly.
He was reacting to the reported warning of US Secretary of State Pompeo that the rescue fund provided by the IMF to Pakistan should not be used to repay debts to China.
The spokesman said, “I think the IMF has its own standards and rules when it cooperates with relevant countries. I believe they will handle it properly.”
Replying to a question relating to the United States’ increased investment in the Asian region in response to China’s One Belt, One Road (OBOR) initiative, the spokesman said if the US and other countries are willing to increase their investment in regional infrastructure and connectivity, we welcome and remain open and inclusive.
Earlier, PTI leader Asad Umar, who is considered to be the nominee of next government for finance minister and will be leading the negotiations if the upcoming government decides to knock at the door of the IMF, had said that no option including going to the IMF has been ruled out.
On the other hand, Pakistan and US reiterated their resolve on Tuesday to restore their bilateral relationship.
This was noted during a meeting between Pakistan’s Ambassador to the United States Ali Jahangir and US Secretary of Defence James Mattis at Pentagon in Washington.
Jahangir and Mattis discussed matters related to restoration of bilateral ties between the two countries, while regional security in South Asia also came up during the course of the meeting.
Pakistan is struggling to avert a currency crisis that has presented the new government with its biggest challenge. Many analysts and business leaders expect that another IMF bailout, the second in five years, will be needed to plug an external financing gap.
Pakistan has had 14 IMF financing programs since 1980, according to fund data, including a $6.7 billion three-year loan program in 2013.
Among the challenges facing the new government, the immediate priority has to be to correct imbalances. A full-year current-account deficit of 5.7 per cent of GDP isn’t exactly a shallow hole, and there’s no guarantee that an 18 per cent drop in the rupee in the past year will do much to fill it.
From December 2017 till the middle of July this year, the rupee has been devalued in four rounds by the State Bank of Pakistan by around 21 per cent to stimulate exports, which grew by around 14 per cent to $23.228 billion in recently concluded FY18.
The Pakistani rupee’s near-18 per cent slump puts it among the 11 worst-performing currencies that have slumped 10 per cent or more over the past year.
And foreign exchange reserves plunged to a four-year low and as of July 13, central bank reserves were recorded at $9,063.6 million.
However, correspondingly imports skyrocketed to a record high of $60.898 billion, growing 15.10 per cent and contributing to the trade deficit reaching $37.670 billion in FY18.
The economic mismanagement of the previous government, rising external and domestic debt, the balance of payments problem challenges will create a lot of headaches for PTI.
Although, the economy grew at 5.8 per cent during FY18, the highest in a decade but Fitch in its advisory earlier this month warned that after general elections, the next government would have limited time address its debt problems which are bound to accelerate in 2019, hence, requiring concentrated policy efforts and swift implementation starting this fiscal year.
Talking to Pakistan Today, Pak Kuwait Investment Co AVP Research Adnan Sheikh had highlighted the challenges PTI government is likely to face when it comes into power.
Adnan said, “The previous government’s window dressing has left the real economy in shambles while the informal economy has flourished due to lack of checks and balances. Shifting resources from informal to formal channels will be a painful process and many toes will be stepped on.”
He added, “On the economy front, besides the moonshot of some significant angel financing from friendly countries, we likely have no choice but to go to the IMF and one can expect them to turn the screws tight this time given the lax compliance from the previous bailout.”
Interestingly, when PTI comes into power, it will be severely restricted on the policy and financial front, an immediate visit to the IMF for a bailout cannot be ruled out and the global trend of rising interest rates and increasing oil prices either wouldn’t ameliorate its cause.