Pakistan is on the brink of economic disaster, experts say.
Foreign exchange reserves are at four-year lows, pressuring the local rupee and triggering worries that Islamabad may soon be unable to finance monthly import bills. The developing country is also awash in external debt, having taken on loans from China for the $62 billion China-Pakistan Economic Corridor.
To avoid a full-blown balance of payments crisis, Islamabad needs outside help. It has two options: the International Monetary Fund or Beijing. Neither, however, may solve its economic woes in the long run.
The South Asian nation is no stranger to IMF bailouts — it has gone through 21 programs in total, with the most recent one ending two years ago. If the administration of incoming Prime Minister Imran Khan seeks out another loan, estimated at $10 billion, the country will be subject to the IMF's strict austerity measures that're likely to hurt growth. It also wouldn't bode well politically for Khan, who called on the campaign trail for Pakistan to become self-sufficient.
The U.S., meanwhile, has taken issue with the idea of IMF funds going toward Pakistan's Chinese debt obligations. "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," Secretary of State Mike Pompeo told CNBC last week.
In response, Pakistan's finance ministry has refuted Pompeo's linkage of IMF assistance with the China-Pakistan Economic Corridor.
Alternatively, Khan's government could turn to China for fresh loans. But that would mean Islamabad wading even deeper into the so-called "Chinese debt trap" — a frequent criticism of Beijing's infrastructure spending spree that's known as the Belt and Road Initiative, of which the CPEC is a part.
Last month, the Asian giant loaned Pakistan $1 billion to boost its shrinking foreign currency reserves. For the current fiscal year thus far, China's lending to Pakistan is set to exceed $5 billion, according to Reuters.
Chinese preferential loans currently account for around 10 percent of Pakistan's foreign debt, while 42 percent is from multilateral financial institutions, China's embassy in the Islamic Republic said in a July statement.
Khan, who is due to be sworn in later this month, is without an obvious solution, analysts say.
"Without the implementation of a bold reforms agenda, neither option will be able to wean Pakistan off its addiction to foreign loans to keep its economy afloat," warned Uzair Younus, director of the South Asia practice at strategy firm Albright Stonebridge Group.
Option 1: The IMF
IMF programs are inherently bad for Islamabad, Nadeem ul Haque, former deputy chairman of Pakistan's Planning Commission and a former IMF senior resident representative, wrote in a Project Syndicate op-ed last week.
The economist described Pakistan as "an IMF addict," outlining how IMF loans undercut "productivity and growth potential by eroding governance and state capacity, and creating conditions for ever more rent-seeking and corruption."
"Alongside distortionary tax policies, the IMF has forced the finance ministry into unplanned spending cuts without any real reforms," he continued, noting that those cuts force governments to halt public services and infrastructure projects. "New IMF funding will no doubt lead Khan's government to repeat past mistakes," he added.
Others were less critical.
IMF austerity measures may dampen economic growth, Younus said, but Pakistan's growth momentum wasn't actually lost during its last IMF round thanks to economic activity generated by Chinese-financed projects and savings from low oil prices.
If Khan does request an IMF bailout, the real test will be whether he can achieve reforms such as widening the tax net and capping losses generated by state-owned enterprises, Younus added.
Option 2: Beijing
Loans from the world's second-largest economy also carry economic risks.
"China provides loans; Pakistan (among other things) imports equipment and services and adds to its debt and debt service; the current account deteriorates," Mark Sobel, a senior advisor at the Center for Strategic and International Studies, wrote in a note last week.
"Chinese lending should be on realistic terms and consistent with Pakistan's sustainability. Otherwise, China should reschedule or write down its loans, sharply reducing the value of its claims," continued Sobel, a former U.S. representative at the IMF.
The Belt and Road is widely believed to magnify sovereign debt risks in participating countries that have borrowed from Chinese President Xi Jinping's government for infrastructure projects. And if those nations are unable to repay, their strategic assets could fall into the hands of Chinese ownership. That's what happened in Sri Lanka, when Beijing took control of the Hambantota port following Colombo's inability to pay back the $6 billion it owed.
In Pakistan's case, the interest rates on some Chinese loans may be higher than the South Asian nation can afford, according to Sobel.