How US policy is turning Pakistan into a Chinese colony, thwarting America’s regional ambitions

Adnan Aamir

Ever since the inception of the economic corridor in April 2015, there were concerns that the US government would oppose the project under some pretext. The moment came on July 30 when US Secretary of State Mike Pompeo vowed to block an International Monetary Fund bailout package for Pakistan if it is used to repay Chinese loans borrowed under CPEC.

Pakistan held its general elections on July 25, which were not free from claims of irregularities. However, election results confirmed that cricketer-turned-politician Imran Khan will form the government. It was revealed that finance ministry officials have already presented an option for the new government to borrow US$12 billion from the IMF to ease pressure on dwindling foreign reserves and repay overseas loans.

Pakistan’s economy is struggling and its remaining reserves of just US$9 billion can only cover the country’s imports for the next two months. Therefore, an IMF bailout is inevitable if Pakistan’s economy is to survive.

Unexpectedly, just five days after Pakistan’s elections, Pompeo opposed an IMF bailout package to Pakistan. He argued that American taxpayer dollars are part of IMF funding and therefore the US government would not allow a bailout package for Pakistan that could be used to repay Chinese creditors or the government of China. This is the first time the US government has openly made a move that is tantamount to attacking Pakistan-China economic cooperation.

It is a move that will further damage the US’ relations with Pakistan. The “war on terror” after September 11 made Pakistan a close ally of the US. From 2002 to 2016, Pakistan received US$33 billion in military and economic aid from the US. However, over time, US-Pakistan relations lost their warmth because of the US administration’s increasing demands that Pakistan stop the Taliban from using its territory to mount attacks in Afghanistan. In August 2017, relations reached a new low after the announcement of US President Donald Trump’s new Afghanistan strategy, which criticised Pakistan for harbouring Taliban terrorists.

Against this backdrop, Pompeo’s recent statement is a major blow to US-Pakistan relations. This does not bode well for peace and stability in Afghanistan because now Pakistan will not be motivated to cooperate with the US government anymore on the Afghan front.

Given that the US is a major power broker in the IMF, its opposition will effectively thwart a bailout package for Pakistan. The country will have to explore other options to secure the funds needed to stimulate its economy. Unfortunately, there are not many countries or funding organisations that can offer Pakistan a generous financial bailout. Thus, Pakistan would be left with no choice but to ask for help from its all-weather friend – China.

Pakistan is already relying on Chinese loans to stabilise its currency, the Pakistani rupee. China has already agreed to lend Pakistan US$2 billion, of which US$1 billion has already been paid and is helping to to temporarily stabilise the value of the rupee.

Pakistan has been on a borrowing spree for past 12 months due to its economic woes. Pakistan has borrowed US$10 billion in last 12 months, of which US$4.4 billion came from China, apart from the latest US$2 billion loan. After the probable refusal of the IMF bailout package, Pakistan will be seeking additional loans of US$12 billion from China. This will further widen Pakistan’s vulnerability to the so-called Chinese debt trap.

Last month, the Chinese embassy in Pakistan downplayed the debt trap, claiming that only 10 per cent of Pakistan’s foreign loans have been borrowed from China. If that is the case, Pompeo’s concerns that Pakistan will use the IMF bailout to repay Chinese loans are overblown. However, experts disagree with this assertion, noting that Chinese institutions lend on the condition that they will be paid out first as preferred creditors. This implies that Pakistan would have to use the IMF bailout to first repay Chinese loans.

A US$12 billion bailout package from China would substantially increase Pakistan’s debt to China since Chinese loans are already financing CPEC projects. Pakistan’s former finance minister Hafiz Pasha said Pakistan would have to pay as much as US$8.3 billion annually from 2019 onward to service CPEC loans.

The latest bailouts from China will further increase the debt servicing requirements, which will be extremely hard for Pakistan’s struggling economy to meet. Hence, Pakistan will further be pushed towards economic dependence on China. If it is unable to repay Chinese loans, it could end up leasing its assets, such as Gwadar Port, to China. This model has already worked with Sri Lanka’s Hambantota port.

The US decision to block the IMF bailout has effectively put Pakistan on the path to becoming a Chinese economic colony. This will certainly not help the US in increasing its influence in South Asia and Indochina, but will rather immensely increase the influence of China in South Asia.