China has provided Pakistan with over $1bn in bailout loans since June last year, as the south Asian country looks to stave off a foreign currency crisis that could yet lead to another multinational rescue package.
State-backed Chinese banks have come to Pakistan’s rescue on two separate occasions, officials have told the Financial Times, with $900m coming in 2016, followed by another $300m in the first three months of this year.
The loans demonstrate the perilous fragility of Pakistan’s stocks of foreign currency, which have been depleted in the past few months as imports have risen while both exports and inbound remittances from Pakistanis abroad have fallen.
There are plenty of political reasons why Beijing would offer Islamabad cushy loans. China is increasingly courting Pakistan as a key ally in order to balance against India, consolidate its “string of pearls” of strategic ports in the Indian Ocean, and use the China-Pakistan Economic Corridor as the lynchpin for its broader One Belt, One Road initiative. But much like China’s doomed investments in Venezuela, its bailout of Pakistan seems to be a classic case of political considerations trumping sound economic strategy.
As the FT explains, Pakistan last year finished repaying a $6.6 billion loan from the IMF, leading some to prematurely conclude that Islamabad was on the road to stability. But meanwhile, its growing trade deficit with China has continued to deplete its currency reserves, leading China to quietly extend emergency loans so Pakistan can repay the older loans and stave off default. And the vicious cycle could well get worse: as Pakistan’s trade gap with China widens, experts are warning that it may need return to the IMF cap in hand for further loans.
This is hardly the recipe for a healthy long-term economic relationship, but it does provide yet another data point in how China’s politically motivated lending will cause Beijing headaches for years to come.