World Economy

China bails out Pakistan with over $1bn in loans

Kiran Stacey, Farhan Bokhari & Henny Sender
A Chinese worker stands near trucks carrying goods during the opening of a trade project in Gwadar port, some 700 kms west of the Pakistani city of Karachi on November 13, 2016.
Aamir Quershi | AFP | Getty Images

China has deepened its economic pull over its neighbour Pakistan over the past year, providing over $1bn in loans to help the South Asian country stave off a potential currency crisis.

State-backed Chinese banks have come to the nuclear-armed state's rescue on two separate occasions, officials have told the Financial Times, with $900m coming in 2016, followed by another $300m in the first three months of this year.

The loans demonstrate the perilous fragility of Pakistan's stocks of foreign currency, which have been depleted in the past few months as imports have risen while both exports and inbound remittances from Pakistanis abroad have fallen.

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Beijing's financial help also underlines the increasingly close relationship between the two Asian neighbours amid strains between Pakistan and the US.

Beijing is preparing to invest at least $52bn in Pakistan to build a highway, energy pipelines, power generation and industrial parks from the western port of Gwadar on the Gulf to the Chinese border 3,000km to the north.

But despite its expected impact on Pakistan's competitiveness, the infrastructure project — named the China-Pakistan Economic Corridor — is set to further deplete the country's stocks of foreign currency, needed to pay the contractors and suppliers.

Figures from the State Bank of Pakistan show the country had $17.1bn of net reserves at the end of February, down from $18.9bn at the end of October and a peak of $25bn several years ago.

This has forced the country to seek emergency loans from outside sources to repay older loans made in foreign currencies.

Of the $1.2bn from the Chinese institutions, $600m came from the government-run China Development Bank and another $600m from the state-owned Industrial and Commercial Bank of China, the only mainland bank to have a branch in Pakistan. Policy banks such as CDB often act on behalf of the central bank.

One Pakistani official said: "China keeps a very close eye on our economic trends and they're happy to come to our help wherever needed."

But experts are also warning that Pakistan is likely to have to return to international institutions such as the IMF, to which it sought recourse in 2013, for further support.

"Technically speaking we should have gone back to the IMF in January, but ministers are likely to try and wait until after the election [for parliament planned for 2018]," said Vaqar Ahmed, deputy executive director of the Islamabad-based Sustainable Development Policy Institute.

One member of the ruling PML-N party confirmed to the Financial Times that ministers were loath to return to the IMF until after the election in an effort to limit the political fallout."

The IMF is a politically volatile issue in our country. If we go to the IMF to deal with our needs, that will send a very negative political signal and the opposition [parties] will use that against the government," the person said.

It was only last year that the country completed repaying the IMF debt incurred in 2013, a repayment that led policymakers in Pakistan and abroad to express optimism that the country was finally on the path to economic stability.

Christine Lagarde, the head of the IMF, called it a "moment of opportunity" for the country.