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Pakistan's Prime Minister Imran Khan wrapped up a four-day visit to China on Monday without achieving his primary goal of securing Chinese financing. As the South Asian nation scrambles for external help, it may have no choice except to approach the International Monetary Fund for what would be its second bailout in five years.
Beijing is committed to assisting Islamabad but more talks are needed, Chinese Vice Foreign Minister Kong Xuanyou was quoted as saying on Saturday after a meeting between Khan and Chinese Premier Li Keqiang.
Pakistan's economy, however, may not be able to wait much longer. The country urgently needs a capital boost in order to avert a looming balance of payments crisis. Foreign reserves held by the central bank dropped below $8 billion in late October, raising concerns about Islamabad's ability to finance monthly import bills.
Beijing is one of Islamabad's closest allies and a major investor, having loaned the South Asian nation around $4 billion in the fiscal year that ended in June, according to multiple reports. Chinese President Xi Jinping has also committed billions to building the China-Pakistan Economic Corridor. A network of transport, energy, industrial and agricultural projects, the CPEC runs from the Pakistani city of Gwadar to the Chinese region of Xinjiang.
Beijing's decision to hold off on more loans — its most recent one, worth $2 billion, came days following Khan's election in July — may be tied to the trade spat with Washington, suggested Sahar Khan, a visiting research fellow at the Cato Institute. The world's second largest economy has experienced tightened liquidity conditions recently amid currency declines and pressure from U.S. President Donald Trump's tariffs.
"China's refusal to agree to anything specific during Khan's trip is a bit of a setback," said Michael Kugelman, deputy director of the Asia program and senior associate for South Asia at the Wilson Center. But given rising concerns in Pakistan about the CPEC, Xi's government may be signaling "that it's time for Pakistan to figure out how to make things work," he added.
Abdul Razak Dawood, Pakistan's cabinet member for commerce, industry and investment, told the Financial Times in September, that he believes CPEC should be put on hold for a year, adding that Chinese companies in the country held an undue advantage over local firms.
Even before Khan's trip to China, his government was widely expected to ask the IMF for a bailout. But the cricketer-turned-politician, who delivered a keynote address at the China International Import Expo on Monday, had expressed a preference to seek funding from friendly countries first.
The Islamic Republic already received a $6 billion rescue package from Saudi Arabia last month — a deal seen by some as Riyadh's way of keeping its friends close amid international pressure over the killing of journalist Jamal Khashoggi, a critic of Riyadh who was murdered after entering the Saudi consulate in Istanbul on Oct. 2. Some U.S. lawmakers and Turkish officials have said Saudi Crown Prince Mohammed bin Salman ordered the assassination, but the Kingdom denies those allegations.
"The Saudis have basically given $6 billion in assistance as a 'thank you' to the Pakistani government for standing by them during a time of crisis," said Uzair Younus, director of South Asia practice at strategy firm Albright Stonebridge Group. "It is definitely linked to Khashoggi's murder."
"The deal likely came with an unstated expectation that Pakistan will need to reassert its allegiance to the Saudis in the Saudi Arabia-Iran rivalry, despite the new Pakistani government's robust expressions of neutrality, " added Kugelman.
The Pakistani premier has already announced that his administration will mediate between Riyadh and Tehran in Yemen, "though how he plans to do that is unclear," said the Cato Institute's Khan.
Without more external financing, an IMF bailout for Pakistan now appears inevitable. Many economists argue that IMF loans create a debt trap for emerging economies but the same has also been said about Chinese investment.
"Islamabad wanted to get some degree of financial support from a bilateral partner so that it can bring down its ask of the IMF," according to Kugelman. "The way Islamabad sees it, the less it needs to ask from the IMF, the more leverage it may have at the negotiating table with the Fund."
The United Arab Emirates could also be a potential lifeline for Khan's administration following reports that both countries held discussions about a deferred oil payment facility, Pakistani media reported in late October.
"Regardless of whether the Chinese or the Emiratis provide assistance, Pakistan will enter IMF negotiations for another bailout," said Younus. "The size of this bailout will be determined by what assistance can be gained from the Chinese and the Emiratis."
There's still a chance Beijing could eventually come around.
The relationship between Chinese and Pakistani leadership remains nascent so "assistance will flow only after the Chinese believe that they have a strong partner in the PTI government that is ready and capable of pushing through more projects," Younus said, referring to Khan's ruling Pakistan Tehreek-e-Insaf party.
Further complicating the matter is U.S. objection to an IMF bailout for Islamabad. Speaking to CNBC earlier this year, U.S. Secretary of State Mike Pompeo said IMF funds would essentially bail out Chinese bondholders or China itself.
"Pakistan represents a litmus test of all future cases in which the IMF, United States, China, and any emerging market country are all involved," analysts at the Center for Strategic and International Studies said in a recent note. "Depending on how Beijing chooses to navigate Pakistan's financial crisis, China may soon find itself responsible for rectifying the debt burdens of Zambia and many other [Belt and Road] countries."