While the government is getting considerable flak due to the long delay in IMF program revival and resulting cost-of-living implications for its low-income population, the ‘foreign policy’ dimension of this deepening crisis has been overlooked by many economists and analysts. Rather than being a victim of some offshore conspiracy, Pakistan, which alone bears responsibility for its mismanagement, also happens to be unlucky to find itself in the middle of an intensifying crossfire between China and the West.

First, some background. Since the 2007-08 Global Financial Crisis, the Paris Club lenders (mainly US and other Western nations and Japan) have been slow to disburse official loans to developing countries, whereas China has considerably increased its sovereign lending (including under Belt and Road Initiative) to developing countries over the past decade. The West warily watched China’s growing influence across the world in the mid-2010’s, until growing debt-distress of countries like Sri Lanka and Pakistan in later years provided openings to criticize Chinese loans and transparency. It was under Trump administration in late 2019 when US officials publicly started attributing CPEC to Pakistan’s macroeconomic woes. Compared to a decade ago, it is a more complex environment today for BOP-challenged countries (may of which happen to have binged on Chinese debt) to seek emergency cash from the lender of last resort. Taking IMF dollars (financed mostly by Western countries) from one hand and paying off Chinese official and commercial lenders with the other hand is no longer acceptable. Especially when there is little hope for these countries to beat this crisis in the medium to long term without immediate debt relief measures.

The war of words taking place behind-the-scenes between the two big powers came into the open last week. It is becoming clear that the West (mainly the US) is demanding that China commit to restructure its debt to distressed countries like Pakistan, Sri Lanka, Zambia and Ghana before the IMF can proceed with its respective country-bailout packages. China, which does not want to lose face, has publicly expressed its unwillingness to do so, unless debt restructuring is part of a global, multilateral effort.

While Beijing upped the ante last week by attributing debt crisis in developing countries (including Pakistan) to ‘radical’ US fiscal policies in the Covid era, the Americans responded by terming China an ‘irresponsible lender’ that is not helping in debt-relief discussions. In the absence of constructive engagements, the Chinese PM reportedly told the IMF chief last week that “China maintains that all sides should take joint action and share an equitable burden” to help debt-stressed countries.

Amid the rising diplomatic tensions on the question of debt relief, the IMF has been dragging its feet in approving new loans or extending previous bailouts. Difficulties that Pakistan has been facing in getting IMF back on its side(despite undertaking several difficult measures demanded by the Fund) need to be understood in this context as well. As per a report by Reuters last week, the delay between IMF’spreliminary staff-level agreement (SLA) and final Executive Board approval has become unusually long.

“Sri Lanka has been waiting for 182 days to finalize a bailout after a $2.9 billion September staff level deal – while Ghana, having defaulted on its overseas debt in December following a preliminary IMF deal, has yet to get board approval 80 days later.This compares to a median of 55 days it took low- and middle-income countries over the last decade to go from preliminary deal to board sign-off, according to public data from over 80 cases compiled by Reuters,” as per the analysis. This may partly explain why the Fund has taken too long to finalize Pakistan’s SLA, as there is little likelihood of the board’s approval in time.

Where does this leave Pakistan, a country which still needs to undertake structural reforms to get out of the woods but is now also dragged by ‘great power competition’? Even if an SLA is signed in the next fortnight, there is likely to be more waiting till the Board signs off. Unless US and China come to an understanding on the debt-restructuring question of developing countries as a whole, Pakistan’s financing requests at the IMF (and other IFIs) will keep running into delays – again and again.This shouldn't come as a surprise to the state of Pakistan, as warning signs have been flashing since at least 2019.