Tuesday, October 9, 2018
Saudi Arabia may not be part of CPEC, but Pakistan set to use Kingdom to offset growing Chinese debt
By Vinay Kaura
It needs to be recalled that immediately after Chinese foreign minister Wang Yi's Islamabad visit last month, a senior Pakistani government official termed his country's deals with China as "unfair" because the CPEC agreements tended to benefit Chinese companies alone. Abdul Razak Dawood, the prime minister's advisor, was quoted as saying that "the previous government did a bad job negotiating with China on CPEC — they didn’t do their homework correctly and didn’t negotiate correctly so they gave away a lot." However, the Pakistan government immediately swung into action and refuted this controversial statement while reaffirming the all-weather friendship between the two countries. Pakistan’s finance minister Asad Umar candidly admitted, "We don’t intend to handle this process like Mahathir (Mohamad, Prime Minister of Malaysia)." It needs to be mentioned that Kuala Lumpur has recently cancelled three major China-backed pipeline projects and put a showpiece Belt Road Initiative (BRI) rail link under the scanner.
After much dilly-dallying, Umar finally hinted on 5 October that Pakistan is going to apply to the International Monetary Fund (IMF) for a balance of payments bailout as he expressed Pakistan’s readiness to take "further corrective measures" proposed by the IMF to restore economic stability. But this bailout will not come without a political cost. Khan has been reluctant to seek an IMF bailout during his first 100 days in office because his electoral campaign had been based on getting rid of the begging bowl. This reasoning has led him to meet funding requirements from friendly countries as well as through bringing home foreign wealth of Pakistani nationals.
But the government's economic advisors are totally against this impracticable way as Pakistan requires around $12 billion of additional infusion during the current fiscal year. Moreover, the US secretary of state Mike Pompeo has publicly spoken against lending any American money by the IMF to Islamabad for settling Pakistan's Chinese debts.
It is understandable that the PTI government is looking to Riyadh to bail it out of its financial woes, which made Khan to break his so-called pledge of not travelling abroad in his first three months in office. Within four weeks of coming to power, his decision to visit Riyadh reflected the desperation of his situation as well as the fear of the political consequences of being seen weak among his supporters. He received a very warm welcome in Riyadh, which indicated a new beginning of a very critical relationship that was badly hit when the previous PML-N government refused to send Pakistani troops to Saudi Arabia to fight in Yemen in 2015. This fateful decision had also affected Pakistan's ties with other Gulf countries. But despite the recent lack of warmth in bilateral ties, the Kingdom’s close ties with the Pakistani military remains intact, as exemplified by the appointment of retired army chief Raheel Sharif as head of the so-called ‘Islamic alliance force’. However, Khan’s decision to invite Saudi Arabia to develop a refinery at Gwadar also indicates Pakistan’s willingness to serve its geopolitical interests through the CPEC. The Pakistani finance minister has admitted that Islamabad did not keep Beijing in the loop, and China was only informed of Pakistan’s intent to involve a third-party investor.Pakistan was also trying to use Gwadar as leverage to persuade Riyadh to provide Islamabad with oil on a deferred-payment basis which would substantially reduce the amount of borrowing from the IMF. The Saudis are equally interested in investing in some big-ticked projects in Pakistan as part of their "Vision 2030" development plans that seek to expand their economic horizons and diversify from a largely oil-based model through collaboration and foreign investments.The entry of Saudi Arabia in the equation — the most important non-NATO ally of the US in West Asia — clearly indicates the protection of American geopolitical interests in the CPEC, directly or indirectly. The ambitious Saudi crown prince Mohammad bin Salman has courted the Donald Trump administration to counter Iran's growing influence in the West Asian region. Salman has involved Saudi Arabia in a bloody military conflict in Yemen against the Iranian-backed Houthi militia. It is believed that Pakistan’s CPEC offer to Saudi Arabia to invest in western Balochistan bordering Iran and Afghanistan could upset Tehran. The fears that allowing Saudi Arabia to play an active role close to the Iranian border may fuel sectarian conflict in Pakistan are not entirely baseless. Moreover, Iran would certainly not desire a Saudi presence in Gwadar which is not very far from the Chabahar port.
Although Saudi Arabia has been China’s largest trading partner in West Asia, since the dynamics between them within the CPEC would redefine the engagement in West Asia in terms of global politics and economy, Beijing cannot be expected to remain a mute spectator to this sudden turn of events at a time of greater global geopolitical turbulence. Since the issue of issue of inviting Saudi Arabia into the CPEC involves a number of questions about new geopolitical alignments, the PTI government has taken a U-turn, at least in public. Speaking at a joint news conference with Pakistan's information minister Fawad Chaudhry on 2 October, Minister for Planning and Development Khusro Bakhtiar clarified that there was no decision to bring Saudi Arabia under the framework of the CPEC. He said, "Saudi Arabia is not to become a collateral strategic partner in the CPEC. This impression is not true... The framework between China and Pakistan is bilateral, and Saudi Arabia is not entering that framework as a third-party investor, rather the base of CPEC will be broadened and its pace will be expedited."
Whatever the semantics, there is a strong possibility that Saudi Arabia is going to invest heavily in Pakistan's infrastructure projects, within or without the CPEC.
China has been turning the CPEC into a grand project to maintain incontestable hegemony in Pakistan. Beijing continued to believe that Pakistani government would remain perpetually loyal to China for the CPEC windfall and keep on reaping its benefits without hesitation or any hint of incredulity to Pakistani people, however inconsistent, contradictory, or at odds with the ground realities. This has become unsustainable now. Most surprisingly, Maulana Samiul Haq, who is known as the 'Father of the Taliban', and who favours more Chinese involvement in the resolution of the Afghan conflict, has urged the PTI government to treat China with caution while dealing with a worsening financial crisis. He is reported to have said, "I don’t approve of a relationship that leads us to slavery. Given their (Chinese) handling of Muslims at home, the Chinese will behave like the British East India Company once they dig their feet deeper into Pakistan." As local resentment has begun to move from the streets to government, China seems to be facing the growing challenge of a tactical shift in Pakistan’s official tone from uncritical gratitude to grudging support.
Trying to prevail over critically fragile public finances as well as realising the advantages of hard-bitten realism, Khan has begun to make concerted efforts to revise the terms of engagement on the CPEC projects. When he goes to China in November for a week-long official visit, Beijing is expected to try hard to pacify him by offering more agreeable terms of CPEC projects as well as by agreeing to reschedule some of the bilateral debt. This development simply vindicates India's s principled stand of consistently opposing the Chinese model of infrastructure development through its ambitious BRI which is nothing but a disguised form of ‘debt-trap diplomacy’. Therefore, India should continue to work with the US and other partners in the Indo-Pacific region to develop credible alternatives to the China-led BRI.
By Kamran Haider and Faseeh Mangi
Pakistan devalued its currency while its stocks and bonds rose after the government said it would seek the nation’s 13th International Monetary Fund bailout since the late 1980s in a bid to stabilize the economy.
The South Asian nation’s key stock measure snapped six days of losses to advance 1.6 percent, the most in three weeks, at the close while its dollar-denominated bonds maturing in 2027 climbed the most since July 26 before paring gains. The rupee, a managed float, fell 7.5 percent to 133.64 against the dollar, the most in a single day since Bloomberg started tracking data from 2000. The move is speculated to have been pushed by authorities in response to the IMF’s calls for a weaker exchange rate.
After consulting with “leading economists”, Pakistan will formally approach the IMF for support and Finance Minister Asad Umar will hold talks with officials during the lender’s annual meetings in Bali this week, the Finance Ministry said in a statement late Monday. Umar told Bloomberg in August that the government may need more than $12 billion. Prime Minister Imran Khan, who came to power after July elections, is under pressure to generate external funding as the country faces the latest in a long line of financial blowouts. The IMF said last week that recent government efforts haven’t been sufficient to stem a looming crisis.
“The challenge for the current government is to ensure that fundamental economic structural reforms are carried out to ensure that this spiral of being in an IMF program every few years is broken once and for all,” the Finance Ministry said. “To correct the underlying imbalances, fiscal and monetary actions needed to be undertaken without delay.”
Foreign-currency reserves have plunged 40 percent in 2018 to the lowest in almost four years, while the nation is running twin current-account and budget deficits of more than 5 percent of gross domestic product. Authorities have devalued the rupee multiple times since December.The currency’s latest drop comes after the IMF repeatedly stated that the rupee was overvalued. “The currency move is definitely a devaluation,” said Shahid Habib, chief executive officer at Arif Habib Ltd.“The market knows the macroeconomic conditions and based on those, they are having their own expectations for the exchange rate,” said Abid Qamar, a spokesman at Pakistan’s central bank.
The central bank has raised interest rates to the highest in three years to help shore up confidence in the economy.
“Going to the IMF was a matter of when, not if. For an economy that has become addicted to foreign loans and bailouts, the future is very much like the past,” said Uzair Younus, a South Asia director at Washington-based consultancy Albright Stonebridge Group LLC. “Pakistan may very well find itself seeking another bailout in the next three to four years if it does not do structural reforms.”
The government has deep problems to fix. Less than 1 percent of the nation’s more than 200 million people file tax returns and its exports, including textiles, lag the region. However, Pakistan has yet to formally approach the IMF, the lender’s Chief Economist Maurice Obstfeld told reporters in Bali.
“We’ll be listening very attentively when and if they come to us,” Obstfeld said. “The government expressed a desire to enact deep structural reforms that might break the cycle of Pakistan needing financial support from the fund frequently. That is a very good sign going forward.”
Islamabad has also taken on projects valued at more than $60 billion that include loans from China to bolster its decrepit infrastructure. Critics see that as part of a debt diplomacy trap by Beijing and question whether Pakistan will be ever be able to make the repayments.
Those vast debts have prompted worries from U.S. Secretary of State Mike Pompeo, who warned in July that he would be watching to see if Khan’s government uses IMF funds to pay off the opaque Chinese loans. “Securing U.S. approval on the IMF Executive Board will require Pakistan to strike a fine geopolitical balance between the Trump administration’s concerns over China’s growing economic engagement in Pakistan and the country’s bilateral commitments,” said Bilal Khan, a senior economist at Standard Chartered Plc.
Pakistan’s economic outlook is also at risk from eroding gains in macroeconomic stability and growth may moderate to 4 percent in 2019 and slow to about 3 percent in the medium term, the IMF said on Tuesday.
“We will have to swallow this bitter pill,” Pakistan’s Maritime Affairs Minister Syed Ali Haider Zaidi told Bloomberg in Karachi on Tuesday. “We have looked at all our options.”