In Pakistan’s currency crisis, China is the problem and the solution

Having racked up unsustainable bills in supporting Beijing’s infrastructure master plan, Islamabad is bailed out by China to the tune of US$1 billion – leaving it more dependent than ever on its ‘all-weather ally’

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Pakistani Prime Minister Shahid Khaqan Abbasi attends the inauguration ceremony of the first section of the Multan-Sukkur Motorway, part of the China-Pakistan Economic Corridor. Photo: Xinhua

Published: 1:00pm, 7 Jul 2018Updated: 1:23pm, 7 Jul 2018

A last-ditch Chinese loan may have temporarily rescued Pakistan from a foreign exchange reserves crisis, but experts say Islamabad’s growing dependence on Beijing has become as much a liability as it is an asset.

The US$1 billion emergency loan released in the last week of June boosted Pakistan’s reserves enough to cover two months of imports, which have reached unsustainably high levels largely – and ironically – because of Islamabad’s commitment to the Belt and Road Initiative, Beijing’s plan to link Eurasia in a China-centred trading network.

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Pakistan’s imports of machinery have spiked as it takes on US$19 billion of power and infrastructure projects for the China-Pakistan Economic Corridor (CPEC) project that will link the Chinese province of Xinjiang to the Arabian Sea through Pakistan. Valued at up to US$62 billion and expected to be fully operational in 2030, the trade corridor is the largest component of the plan.

The Multan-Sukkur Motorway in Pakistan, the largest infrastructure project under the China-Pakistan Economic Corridor. Photo: Xinhua

In the first two years of the CPEC project, up to June 2017, Pakistan’s imports of machinery and transport equipment jumped 51 per cent to US$15.5 billion. Meanwhile, the economic relationship with China remains one-sided. While neither government has released detailed bilateral trade statistics, Pakistan’s imports of Chinese goods and services topped US$6.6 billion in the July-December 2017 period, nearly 10 times the volume of Pakistan’s exports to China.

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“Pakistan’s dependence on China has increased startlingly,” said A.A.H. Soomro, senior adviser for Tundra Fonder, a Stockholm-based emerging markets fund manager.