Is China replacing the IMF?

Seeing the gross funding gap; it is clear that Pakistan needs a bailout. Perhaps, someone is already bailing the country out quietly and consistently. Had China not lent $4-5 billion in FY17; Pakistan would have already been in another IMF programme. And the money has not stopped flowing in FY18, as the toll is likely to be around $5 billion.

The Chinese debt is well on top in Pakistan’s total external debt and liabilities. The government got $1 billion in April18 and another $2 billion is expected soon. The toll will easily cross $20 billion out of $91 billion total external debt.

Can Chinese debt be compared to IMF loans? Can these flows be substitute to an IMF programme? It may be too early to comment that Pakistan is looking at China for bailout and will not enter an IMF programme in a few months time.

One thing is for certain that the country needs $8-10 billion in FY19 to not let reserves fall further from existing eight weeks of import cover. Hence, external help is inevitable. Will it be China alone or a combination of China and the IMF?

The external snapshot is simple; the current account deficit is $1.25-1.5 billion a month, out of which $0.2-.0.3 billion are coming from FDI; taking the net financing requirement at $1-1.2 billion per month. 4QFY18 is tough as $3.2 billion principal debt repayment is due which makes gross funding requirement at $6.2-6.8 billion.

That is why the SBP reserves fell by $1.3 billion in the last six weeks despite $1 billion loan from China. This makes a sum of $2.3 billion which implies another $4 billion will either be raised by June end in the form of debt or there will be further drop in reserves.

Can the country afford another drop of $2 billion reserves till June end? If that happens, the import cover will be slashed to mere six weeks. That is too dangerous a situation to be in. The new government will be in power in August. Will the Chinese loan continue or the new government be dealing with the IMF in its first 100 days?

Nobody knows on what conditions are the Chinese loans, unlike the IMF which comes with full disclosure of loan amount, tranches details and conditionalities to be implemented by the government. The Chinese operate subtly; and that is true for other countries as well where Chinese lend and invest.

If China keeps on bailing out; on average, it will be pouring in $1 billion a month while the gross funding requirement would be around $1.5 billion per month in FY19 (as average monthly principal debt repayment is around $0.35 billion). The other bilateral and multilaterals will keep on giving around $0.5 billion per month.

Without any structural reforms, the cycle will continue in FY20 and so and so forth. But can the Chinese loan continue forever without any conditions? There are no free lunches. Everyone knows how the IMF operates. It is a no brainier to conclude that past IMF programmes never led to sustainable growth. The IMF ensures its repayment by bringing austerity which slows down the growth momentum. The conditions of structural reforms are almost always remained un-met.

The Chinese style is different. They want Pakistan to keep on growing to fit in its OBOR model by making CPEC successful. Pakistan wants a debt fueled growth momentum to continue for a few years for engaging youth and lowering poverty.

At the end; the debt will be paid back either by generating exportable surplus or selling the country’s assets. Without structural reforms and resolving governance matters, the eventuality is IMF - be it in a quarter year or five.