It is customary for the Pakistani prime minister to visit China – its all-weather friend and largest bilateral lender – soon after the inauguration ceremony. But Prime Minister Shehbaz Sharif’s five-day visit, from June 4-8, was not about simply following a convention. Pakistan is facing its worst economic crisis in decades. It needs a fresh IMF package; so far it has received 24. Sharif’s delegation included virtually all the key Cabinet ministers, including those for finance, foreign affairs, defence and trade.
The delegation also included Army Chief General Asim Munir. This was justified on the grounds that he is a member of the Special Investment Facilitation Council (SIFC), a body created to attract foreign investment to Pakistan. More than the technicalities, China’s investment in Pakistan is driven by considerations of strategy. The China-Pakistan Economic Corridor (CPEC) symbolises this relationship.
The 32-paragraph joint statement reflects an imbalance of advantage, heavily tilted towards China. Pakistan has fully endorsed the Chinese position on Taiwan. China has confined itself to repeating its old position on the maintenance of peace and stability in South Asia. This includes the joint opposition to unilateral changes in the region – a veiled reference to India’s deletion of article Article 370. It was also present in the statement issued at the end of Prime Minister Imran Khan’s visit to Beijing in February 2022.
Worsening economy
China has emerged as Pakistan’s largest lender with a credit of $27 billion to the country. The World Bank comes a distant second with $14 billion, while ADB has lent $13 billion. There is a link between IMF lending and Chinese credit. The IMF wants to be sure that the fresh money it injects into Pakistan’s economy is not simply used to clear up China’s dues. This requires a Chinese commitment to roll over existing debt payments. The IMF wants this to be done not simply till the year’s end, but until the end of the 3-year credit facility Pakistan is seeking. China is not a member of the Paris Club – a consortium of lenders including major economies like the United States, the United Kingdom, Germany, France, and Japan, among others. There is no transparency in China’s lending program hence the IMF’s precaution is well justified.
Pakistan’s current year budget is based on a growth projection of 3.5 %. The country follows a July-to-June budget cycle. The GDP growth realised in the first quarter (September to December 2023) was 2%. This fell to 1% during the second quarter (October to December 2023). A declining growth rate shows that it will be impossible to meet the target, with consequent revenue shortfall and increased fiscal deficit. Borrowing is needed not simply to cover the balance of payments gap, but to finance the budget.
China-Pakistan Economic Corridor
Pakistani media briefings before the visit had held out the prospect of launching the second phase of the CPEC. The first phase was touted to bring $46 billion. Instead, the net inflow was $25 billion. The bulk of this credit on commercial terms was given against sovereign guarantees. This has worsened Pakistan’s repayment problem. Pakistan would like China to finance a second phase. The joint statement is silent on the Chinese response to the Pakistani request. Instead, it mentions upgrading of the CPEC. Is China waiting for the IMF response before making a fresh commitment? Though Chinese priorities are different, it prefers the IMF’s involvement to share the burden for financing its ally.
CPEC deals with long-term programs and projects. This is not a panacea for Pakistan’s economic problems which require budget support and balance of payment in the short run. Most of CPEC funding is in the form of credit, not investment. This generates more debt payments.
The joint statement mentions four CPEC projects. Mainline 1 (ML-1), a rail corridor linking Sindh, Punjab and Khyber Pakhtunkhwa, is one of them. The second project will be based in Gwadar. The third and fourth projects, in Pakistan-occupied-Kashmir (Gilgit-Baltistan), are related to the realignment of the Karakoram Highway and Khunjerab Pass to Sost Pass, making it functional throughout the year. Except for ML-1, the other three are strategic projects that will not bring commercial benefits to Pakistan. No new big-ticket item has been announced.
Taiwan
China extracted major concessions from Pakistan on issues of core interest to it. Pakistani support for the Chinese position on Taiwan has been part of the previous statements as well. This time, the joint statement also said, “Both sides stressed that the authority of the UN General Assembly Resolution 2,758 brooks no dispute or challenge.” This resolution, asserting the One China position, was adopted by the world body in 1971, when China joined the United Nations. As China steps up military pressure on Taiwan, it is looking for allies to buttress its diplomatic position. How much heft can Pakistan bring to the Chinese stand? This is not simply an expression of fealty by its client state, but an index of resentment China has engendered in bullying its neighbours.
Pakistan has been recently elected to the UN Security Council as a non-permanent member for two years – from January 1, 2025 until December 31, 2026. This will give Pakistan new opportunities to encash its position in the UNSC for shoring up its collapsing economy. This will also expose it to conflicting pressures from its all-weather friend and the US, which has a veto on IMF approval of any new package for Pakistan.