Pakistan’s Churlish China Lifeline

After campaigning on an “Islamic welfare state” platform without “begging” the International Monetary Fund and traditional bilateral lenders China and Saudi Arabia to pay for it alongside estimated year-end debt and import obligations beyond the current $8 billion in reserves, Pakistan Prime Minister Imran Khan recognized the hard numbers and directed his Finance Minister to enter negotiations on another Fund program. A staff mission arrives in November for talks on a loan expected to be again in the maximum $7 billion range agreed five years ago. The Saudi government, after initial hesitation, came through with an oil supply and credit package around the same size on the eve of its boycotted global investor conference over the journalist Jamal Khashoggi’s murder.  It has also promised to join the headline $60 billion in infrastructure projects around China’s Belt and Road initiative.

US Secretary of State Mike Pompeo and Fund Managing Director Christine Lagarde insist that Beijing reveal details of its commercial loan terms under the joint “Economic Corridor,” with the former threatening to scuttle any arrangement that promotes “debt trap diplomacy.”  Chinese capital goods imports have also swelled the current account deficit to 6% of gross domestic product, a gap uneven garment exports and remittances and flat foreign direct and portfolio investment cannot readily bridge. The stock market and rupee fell around 25% through mid-October on admission of dire fiscal and balance of payments straits, and the prospect that the country would follow other Asian borrowers’ path to gain breathing space. Analysts pointed out that assets could be relinquished as in Sri Lanka’s port majority ownership, or projects cancelled or postponed as in Malaysia and Myanmar’s recent decisions. In Pakistan’s case external conventional and sukuk bond holders are likely to be part of the workout as well, after previous restructuring decades ago in the aftermath of the Asian financial crisis. Private creditors could be asked for cash flow relief through extending maturities, or for outright interest or principal reductions. The Paris Club of Western bilateral providers, where China is an observer without subscribing to its rules, in turn reschedules lines under a longstanding formula. Beijing has not shown its hand either in data or approach, and may leave the situation in limbo as in other regions to Islamabad’s and emerging market investors’ frustration

Africa has accumulated large scale collateralized debt to China’s Export-Import and Development Banks on non-concessional terms, as described in recent Standard Chartered research surveying a dozen countries. Djibouti is arguably the most extreme as its load mostly owed the Chinese doubled in several years to almost 100% of GDP in 2017. For private market issuers including Angola, Cameroon, Ethiopia, Zambia and Kenya, China’s portion of external debt ranges from 20-40%, and observers warn the calculations could be greatly understated with limited reporting and verification. Zambia’s application for IMF support and domestic politics have been upended by undisclosed government and state company borrowing, and Mozambique and the Republic of Congo already entered formal restructuring with commercial creditors where Chinese participation alongside another Fund program is a major complication.

The Washington-based Institute for International Finance provided summaries of post-default progress for the two countries in its October update on compliance with the voluntary code of conduct on creditor-debtor communication and coordination adopted in the early 2000s. It labeled Mozambique a “cautionary example” for still failing to account for $500 million in hidden loans from the original unexplained total triple that size. In March the government proposed a write-down through an exchange for a 50% net present value loss that bondholders rejected out of hand. In August a counteroffer was presented tying future payments to hydrocarbon revenue streams, but a Fund facility remains out of reach with the debt-GDP ratio over 120% and China on the sidelines. The Republic of Congo’s Chinese obligations increased tenfold in a few years to $3.5 billion after it got poor country bilateral and multilateral cancellation in 2010. Multinational oil traders and regional and European banks are also commercial creditors, and IMF ties are likewise hung up on unrevealed sovereign and state company debt. While “good faith” negotiations are underway, a main roadblock is uncertainty over Beijing’s “comparable treatment” once a deal is struck, and that admonition applies to a quick resolution of Pakistan’s impasse.

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