Embattled Pakistan gets US$700 million China surprise, but threat of ‘lost decade’ remains

China’s unexpected loan buoys Pakistan’s central bank forex reserves up to nearly US$4 billion, which is less than a month’s worth of imports

But Islamabad isn’t likely to enact the structural reforms needed to rescue it from a potential Sri Lanka-like default, observers say

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Men reach out to buy subsidised flour sacks from a truck in Karachi, Pakistan. Photo: Reuters/File

Published: 6:00pm, 1 Mar 2023Updated: 8:07pm, 1 Mar 2023

China has thrown financially floundering Pakistan a US$700 million lifeline amid critical negotiations with the International Monetary Fund (IMF), with a further US$1.3 billion in new loans potentially on the horizon to boost the foreign exchange reserves of Beijing’s close strategic ally.

Prime Minister Shehbaz Sharif welcomed the unexpected funding by China Development Bank on Friday, saying it had not been anticipated until the IMF released a delayed US$1.2 billion tranche, possibly some time this month.

An “allied nation a few days ago conveyed to us that ‘we are giving you this straight away’, and these things can never be forgotten”, Sharif said.

Pakistan’s Prime Minister Shehbaz Sharif. Photo: Reuters/File

The US$700 million loan buoyed Pakistan’s central bank forex reserves up to nearly US$4 billion, which is just shy of a month’s worth of imports.

Delays in an agreement with the IMF prompted Moody’s rating agency to downgrade Pakistan’s long-term foreign debt rating by two notches to a historic low of Caa3 on Monday. It also matched the February 14 decision of Fitch Ratings by cutting Pakistan’s credit rating to CCC- from CCC+. Both those ratings are just above what would be considered default status.

The hoped-for resumption of IMF funding in March is expected to trigger other billion-dollar inflows of financial help from allies Saudi Arabia and the United Arab Emirates, as well as project funding from multilateral lenders like the World Bank and Asian Development Bank.

Pakistan’s economic crisis is of its own making

Maleeha Lodhi, former Pakistani ambassado

But with the nation of 230 million people long subject to poor leadership by elites, former officials and analysts do not expect Pakistan’s government to enact the structural reforms needed to rescue it from a potential Sri Lanka-like default.