The US often struggles to convert its economic power into political outcomes, though President Trump has ramped up efforts to do precisely that. In the fight against terrorism, the US Treasury has greatly expanded its efforts to cut off financing and through the experience and the Great Financial Crisis, access to the US dollar market, including for funding, is not simply a utility but is a privilege that the US could deny its adversaries.
There are other ways in which the US can use its financial acumen to impose its will. Here is a drama that is unfolding, though it has not percolated into the public’s consciousness yet. It begins in Pakistan, which has been party to at least 13 IMF programs since 1980. Although it has not formally asked for another one, macro considerations suggest it is likely. Many expect Pakistan’s likely new Prime Minister, Imran Khan, to seek one shortly after assuming office. His party is about 22 seats shy of a parliamentary majority, after running a campaign against the two main ruling families. The US is threatening to veto it, which would make it hard for Pakistan to service its debt. Its debt is primarily owed to the IMF, World Bank, and China.
Pakistan is caught between a rock and a hard place. Given the number of times it availed itself to IMF assistance, it will be reluctant to stiff the multilateral lenders. It also wants to avoid having a debt problem with China, which has shown itself to be a harsh taskmaster. Loans from China are often not on concessionary terms and involve collateral. Recently, for example, Sri Lanka has to transfer ownership of Hambantota port to China (for 99 years, shades of Hong Kong).
China’s loans to Pakistan are part of a $60 bln infrastructure development project dubbed China-Pakistan Economic Corridor (CPEC) which is part of China’s Belt-Road Initiative (BRI) It borrowed an estimated 20% or $12 bln from Chinese commercial banks. Meanwhile, Pakistans exports are falling, and combined with rising oil prices, is leading to deterioration of its current account and a draining of its official reserves. As of two weeks ago, Pakistan’s reserves were reported at about $9 bln. This is less than two months of import coverage. The rupee has lost about 11.5% against the dollar this year after depreciating by 5.5% in 2017.
Reports suggest that Pakistan may need a few billion dollars to carry it through the next few months. The last IMF assistance was in 2013 for $5.3 bln. There have been some reports claiming that the country will seek as much as a $12 bln credit line. The IMF would likely demand concessions, and it could force the new government to backtrack from its campaign promises to boost social spending for education, healthcare, and the social safety net. The IMF projects the fiscal deficit could reach 7% this year compared with a 4.1% target.
China’s liberal lending practices offer an alternative to the conditionality the multilateral lenders demand. US policymakers chaff under the Chinese efforts, which saddle countries with more debt and little incentive to reform. US policymakers recognize that China is using its loans to influence other countries. These projects often put the US businesses at a commercial disadvantage.
Pakistan is not unique in its struggle to repay its debt to China. A recent study by the RWR Advisory Group found that almost a third of the value of the loans related to China’s Belt-Road initiative since 2013, or nearly $420 bln are in trouble due to persistent project delays, public opposition, and national security issues. Malaysia’s new government has suspended new Chinese-backed infrastructure projects and reviewing existing projects. Cambodia’s surge of capital equipment imports related to China’s infrastructure projects is causing economic problems beginning with the trade deficit swelling to 10% of GDP.
Pakistan does not have many alternatives. In 1998, amid another debt crisis, Saudi Arabia agreed to defer oil payments. The Saudi’s financial position has changed, and it may be less willing to delay payments again, which is a short-term fix in any event. The IMF expressed concerns about the implication of the CPEC investments on Pakistan’s balance of payments a few months ago. However, the multilateral lender took exception at the US claim that emphasized CPEC loans with Pakistan’s current straits. The IMF is engaged with Pakistan via the Post-Program Monitoring and regular Article IV consultations.
As of now, there is no formal request from Pakistan. The US has made its opposition known. A veto remains an implicit threat. However, there can be no mistake, the US is looking for ways it can block the expansion of China’s influence. US policymakers and investors seem to be of two minds. On the one hand, they see a slowing economy, large debt, and an ossified political system, which is often seen as contradicting the modernizing economy. On the other hand, China is seen as pushing to supplant the US and the dollar. Since the 2016 US election, China has been defending the status quo, multilateral institutions, and trade. Chinese officials seem to believe that under the current rules, it can win. The US is the one seeking to change the rules of engagement.