Pakistan’s Catch-22: how can it keep Chinese investors happy, but not alienate the US?

Abdul Basit says the political skills of Pakistan’s new government are being put to the test. Islamabad must ensure progress on its belt and road projects with China, and still win Washington’s support to get an IMF loan and stay afloat

Abdul Basit

Published: 3:00am, 29 Oct 2018

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After years of political and economic competition, things have come to a head between the US and China. In recent months, both sides have imposed tariffs on each other’s imports. On September 30, a Chinese Navy warship sailed within 41 metres of a US destroyer near one of the islets that China claims in the Spratly archipelago in the South China Sea.

Two days later, US Vice-President Mike Pence delivered a scathing anti-China speech at the Hudson Institute that has been regarded as an official declaration of a “new cold war”. To counter China’s Belt and Road Initiative, the US has announced an “Indo-Pacific” strategy, which includes technology, energy and infrastructure initiatives in emerging Asia.

In its most recent national security strategy report, the Trump administration prioritised the Indo-Pacific over Europe, the Middle East and all other regions. Specifically, the report categorises both China and Russia as disruptive forces, which “challenge American power, influence, and interests, attempting to erode American security and prosperity”. (Iran and North Korea are not far behind in the report.)

This new competition will have far-reaching consequences for global trade, peace and inter-state relations. In the ensuing political rebalancing, new rivalries and alliances will be born.

The worsening US-China relationship comes at a time when a new Pakistani government is grappling with a multitude of economic and diplomatic challenges. The US-China tug of war has forced Pakistan to walk a tightrope between retaining Chinese investment in infrastructure and securing US support for a bailout package from the International Monetary Fund to avert a balance-of-payments crisis.

Why is Pakistan backing away from China’s influence?

Pakistan desperately needs up to US$12 billion to boost its depleting foreign reserves and bridge its fiscal and current account deficits. As of this week, due to external debt servicing and the depreciation of the rupee against the dollar, Pakistan’s foreign reserves have reportedly dipped under US$8 billion – when it still has to make debt payments of US$8 billion till December. Unsurprisingly, the Pakistani stock market has tanked.

Out of that US$12 billion, Pakistan has secured US$6 billion in financial help from Saudi Arabia, comprising a deposit of US$3 billion with the State Bank of Pakistan for one year and US$3 billion in deferred payments for oil. But Pakistan still needs an IMF loan to improve its credit rating and investors’ confidence. It would be the country’s 13th bailout from the IMF since the 1980s.

‘We’re desperate’: Pakistan PM defends seeking loans from Saudis

Boys in Karachi, Pakistan, fly a kite along the dry bed of the Lyari River. Pakistan desperately needs up to US$12 billion to boost its depleting foreign reserves and bridge its fiscal and current account deficits. Photo: Reuters

The Trump administration is capitalising on Pakistan’s request for an IMF bailout to push back against the China-Pakistan Economic Corridor, a collection of infrastructure projects forming the flagship of the Belt and Road Initiative. Anticipating the request, US Secretary of State Michael Pompeo warned the IMF that American taxpayers’ money should not be used by Pakistan to pay back Chinese lenders or bondholders.

At a meeting with the Pakistani delegation in Indonesia, the IMF demanded Pakistan disclose the terms and conditions of the Chinese loans and infrastructure projects. Such demands are Chinese redlines: Beijing has been very sensitive about the details of the projects.

Since January 2018, the hardline policies of the Trump administration have accelerated Pakistan’s gravitation towards China. That month, the US froze US$2 billion in military aid to Pakistan. In June, Pakistan was put back on the Financial Action Task Force’s “grey list” of nations with inadequate controls to prevent terrorist financing; the US was instrumental in Pakistan’s reappearance on the list. In September, the US cancelled US$300 million in counterterrorism reimbursements to Pakistan.

China wasted no time in filling the vacuum created by the steady deterioration of US-Pakistan ties. Around June, China lent Pakistan US$1 billion to prop up its foreign reserves. Soon after Pakistan Tehreek-e-Insaf (PTI) was voted into power in July, Beijing provided a US$2 billion loan to reinforce its alliance with Islamabad.

Pakistani Prime Minister Imran Khan will visit China in the first week of November. Ahead of his trip, the Chinese authorities’ willingness to renegotiate and redesign the China-Pakistan Economic Corridor projects in line with his government’s vision and policies indicates that Beijing will accommodate Islamabad to keep its influence.

In response to the IMF’s demands that Pakistan disclose the terms and conditions of its economic corridor agreements, China has urged the IMF not to politicise the matter and to assess Islamabad’s request objectively and professionally. The Chinese foreign ministry expressed support for Pakistan’s request for an IMF loan and denied allegations that the economic corridor loans were the reason for Pakistan’s debt woes.

IMF warns Pakistan of risks of working with China

Beijing’s insistence on continuing with the economic corridor projects and Washington’s influence on the IMF have left Islamabad in a Catch-22 situation. On the one hand, Pakistan cannot afford to lose an investor like China. Moreover, the infrastructural development will improve its prospects of foreign direct investment in the long run. On the other hand, Pakistan cannot alienate the US, which still has troops in Afghanistan. No country other than the US has the diplomatic, economic and military clout to avert a civil war in Afghanistan, which will have a direct negative impact on Pakistan.

Faced with a similar situation, several Southeast Asian countries have hedged between the two great powers: they are neither fully independent nor clearly aligned. T he new Pakistani government’s political skills will be put to the test, as Islamabad recalibrates its ties with China and the US and seeks to balance its economic and strategic interests.

Abdul Basit is an associate research fellow at the S. Rajaratnam School of International Studies, at the Nanyang Technological University in Singapore. [email protected]

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