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China's road can be Pakistan's route to rescue
IS THE Pakistani economy on the brink, moving towards a collapse? Should it go to the International Monetary Fund and secure an emergency loan to avert a possible financial disaster?
Based on my experience serving as the World Bank vice-president in charge of Latin America and the Caribbean region, my answer to both questions is "no".
I also have had the experience of working as Pakistan finance minister in the interim government that took office in November 1996 following the dismissal of prime minister Benazir Bhutto.
Then, Pakistan's total net foreign assets were US$42 million, equivalent to less than one day's imports. Today they are over US$10 billion, equivalent to two months of imports. Bankruptcy stared us then in the face but I was able to avert it by securing a US$500 million emergency loan from the Chinese government. This was provided at Libor, a rate considerably lower than would have been the case had we borrowed from the market. What explained this Chinese generosity?
Before moving to the World Bank's Latin American region, I had served for almost eight years as the director of China operations. Beijing was pleased with the way I had handled the Bank's operations and policy work. They were very grateful when I took a strong position against the Group of Seven decision following the June 1989 Tiananmen Square incident. The World Bank and other multilateral institutions were directed to stop all work in China. But the World Bank refused to comply.
I write about this personal experience to underscore the point that China - now under tremendous pressure from the United States - needs to reorient its economy and in this endeavour Pakistan is likely to play a critically important role.
The China-Pakistan Economic Corridor (CPEC) investment programme is the most important component of what Beijing calls the Belt and Road Initiative, or BRI. Given that, Beijing will most certainly not allow Pakistan to sink economically or suffer financially. Beijing also recognises that with the CPEC in place, Pakistan's economy is likely to add something like 2 percentage points to the rate of growth currently estimated at 5.7 per cent a year. The potential growth rate in the neighbourhood of 7.5 per cent a year is not a sign of an economy on the brink.
Going to my experience in the World Bank and relating that to talk of Pakistan returning to the IMF for support, I should emphasise that the conditions that come with that help invariably lead to short-term hardship. The Fund is obliged to focus on the near-term.
When I worked on resolving the Mexican banking crisis in December 1994, the government there took the decision to seek help from the World Bank rather than go to the IMF. The crisis was the result of a major downward adjustment in the dollar value of the domestic currency. The commercial banks that had borrowed heavily in dollars now had to find much larger domestic currency amounts to service their debts.
That was the situation tailor-made for the IMF but the Mexicans came to the Bank instead. I arranged to funnel US$1 billion of fast-disbursing money to recapitalise the banks, a move that had the full support of Lawrence Summers, then United States Treasury Secretary. In return for this help, we had the Mexicans work on increasing their exports which they did as the North American Free Trade Agreement began to take effect.
The new government in Islamabad should resist the pressure to go back to the Fund. If they do that, it would be the 13th time the country would have sought the Fund's help.
The last time the IMF was approached, it provided US$6.6 billion worth of support over a period of three years on conditions that were relatively mild. That was due in part to the support provided by Washington then working under the leadership of President Barack Obama. The current president is less well disposed towards Pakistan. Already, Secretary of State Mike Pompeo has declared that his government would oppose the Fund rescuing Pakistan if that effectively meant servicing the loans Islamabad is receiving under the CPEC programme.
Upon assuming office, the Imran Khan administration should, within 30 days, draw up plans for the short term and focus on easing the financial strains under which the economy is currently labouring. That may involve some additional financial assistance from China.
It should be followed with a medium-term programme for realising Pakistan's considerable growth potential. That should use the CPEC as the central plank for building new economic structures.
Pakistan should open its borders for the passage of goods and commodities through its territory to other countries. It should, for instance, allow India to use Pakistani space for its merchandise and commodities to flow to Afghanistan and points beyond.
The road infrastructure is already there in Pakistan and it should be used to earn foreign exchange. Appropriate transit fees should be charged and the goods and commodities passing through Pakistan should use the country's equipment. This will create a boom for the trucking industry as well as additional employment for those servicing this trade. Once the CPEC infrastructure becomes functional, Pakistan could become the focus of land-based commerce linking the landlocked countries of Central Asia with one another and with the world outside.
Another CPEC-related opportunity presents itself if China were to be invited to invest in developing Pakistan's underused but large agriculture sector for producing high-value products. Pakistan's northern areas could become major supply points for fruits, vegetables and livestock products the Chinese will need as they begin to move their people from the crowded eastern part of the country into the sparsely populated western provinces.
Over the medium term Pakistan should develop its large human resources to take advantage of the enormous investments the Chinese are making in developing their high-tech sectors including robotics, electric cars, self-driven vehicles, facial recognition products.
This would need the development of teaching institutions in Pakistan that could link up with those in China. Foreign universities would be interested in investing in these facilities as they have done in places such as Singapore. Also, the skills-based small and medium industries could become parts of the supply chains that are linking various production facilities with the major centres of production around the world, in particular in China.
All this is entirely possible provided those in power don't get overwhelmed by the doom and gloom from those who have always been sceptical about Pakistan's prospects. Teams of experts could be assembled and tasked to produce Imran Khan's "naya" (new) Pakistan.
- The writer, former Finance Minister of Pakistan and Vice-President of the World Bank, is currently chairman of the Shahid Javed Burki Institute of Public Policy in Lahore.