According to a Business Recorder exclusive, China and Pakistan are close to a deal on balance of payment support of 2.5 billion dollars as a commercial loan rather than a concessional loan (or grant) and finalization of the second phase of the Free Trade Agreement (FTA) which was pending for some time. Subsequent to Prime Minister Imran Khan’s visit to China, Federal Finance Minister Asad Umer in a joint press conference on 6 November 2018 with Foreign Minister Shah Mehmud Qureshi stated that “China has agreed in principle to extend an economic relief package to Pakistan.” However reports not contradicted by the government at the time revealed that while the Pakistan delegation requested balance of payment support at concessional interest rates yet the Chinese refused to accede to this demand and urged the government to first formulate a reform agenda to allow the Chinese to assess whether it was feasible to support it.
Disturbingly to this day the PTI government has not shared its economic reform agenda targeted towards macroeconomic stabilization, necessitating containment of the budget deficit, and instead the focus has been on acquiring loans from friendly countries to meet the yawning current account deficit of around 19 billion dollars. There has thus been no serious attempt to either raise revenue or reduce expenditure and instead the government presented an industrial promotion package that envisages higher and not lower expenditure. This is not to state that the industrial promotion is not a worthy objective just that the state of the economy requires focus on stabilizing key macroeconomic variables at this time.
China as a long-term member of development financial institutions, with reduced reliance on borrowing from these multilaterals as its foreign exchange reserves soared, would, unlike Saudi Arabia and the United Arab Emirates, require a viable strategy before it agrees to extend balance of payment support. Unlike the United States Export Import Bank and other export credit agencies, Chinese banks rarely reveal information on specific financing agreements; and it is also rare for the recipients of such financing to fully disclose the details of the finance they receive from China. Be that as it may, Chinese loan finance is varied with some government loans qualifying as “official development aid,” and others extended as export credits, suppliers’ credits, or commercial in nature hence newspaper reports that China does not extend concessional loans or writes off past loans is not correct. Be that as it may, reports indicate that the 2.5 billion dollar loan to Pakistan would be commercial in nature.
Of growing concern however are the ongoing negotiations on the second phase of the FTA with Pakistan lamenting the yawning trade gap between the two countries subsequent to the 51 agreements/Memoranda of Understanding signed between the two countries for 50 plus billion dollar of investment under the umbrella of China Pakistan Economic Corridor (CPEC). Trade volume between Pakistan and China was 13 billion dollars in 2013 and rose to 20 billion dollars by 2017 with Pakistani exports to China remaining more or less constant at around 1.5 billion dollars. The Khan-led delegation to China in November 2018 reportedly requested opening China to Pakistani products with applicable tariffs on the same pattern as allowed to the ASEAN countries however China reportedly did not agree and informed the delegation that it would seek to double Pakistan’s exports – an offer that would not make any appreciable difference to the trade gap with China. It is unclear what Imran Khan’s administration would agree to in terms of the rate of return on the loan for balance of payment support or the FTA.
To conclude, it is imperative for the incumbent government to procure loans from friendly countries at rates that are competitive and there is little doubt that if China is lending at commercial rates the International Monetary Fund presents a better option. Additionally, if the Chinese disagree to allowing Pakistani exports unfettered access to their markets and limit our exports to a mere 2 to 3 billion dollars at best there is a need for looking at the second phase of the FTA from new but informed perspective.
(This news/article originally appeared in Business Recorder on February 11th, 2019)