Rumor of the Day: China to Help Bail Out Pakistan

♠ Posted by Emmanuel in , at 10/18/2008 05:49:00 PM
I've got to hand it to Pakistani President Asif "Give Me $100B" Zardari--he seems wilier than I thought. Taking a page straight out of the power games handbook, he appears to be playing off two countries vying for regional influence, China and the US. The latest off the rumor mill suggests Pakistan is looking for more than a nuclear power deal with old friend China. Supposedly, Pakistan is asking China to help it raise money as its balance of payments situation worsens. Note, however, that China is just one of the parties Pakistan is looking to for short-term relief given the magnitude of its problems; others include the IMF and regional lender the Asian Development Bank (ADB). Let us begin with the Daily Telegraph on China embarking on a so-called "bailout diplomacy":
Beijing, which has already made billion dollar investments in Pakistan, will use 'bail-out diplomacy' to further enhance its burgeoning power in the geo-strategically sensitive region. President Asif Zardari has been on a fund-raising visit to China as Pakistan faces the prospect of possibly defaulting on massive loans as its foreign reserves have plummeted.

The government announced that Mr Zardari will visit China every three months "to promote economic integration between the two countries". China, which is known as Pakistan's "all-weather friend", has undertaken building nuclear power stations in Pakistan as well as large infrastructural projects such as developing a port on the key Strait of Hormuz at Gwadar...China has long been one of Pakistan's closest political and economic partners, with Beijing looking to Islamabad as a counterbalance to its regional rival India.

Pakistan moved closer to a balance of payments crisis this week as the rupee slumped to a record low after the central bank reported it had barely enough foreign currency to cover six weeks of imports. Pakistan, which is struggling to control an escalating militant threat amid US missile strikes on its northwestern frontier with Afghanistan, requires an immediate commitment of at least $2 billion to restore confidence in the country.

China has so far not yet given any firm commitments on loans, though there were uncorroborated media reports that Mr Zardari asked China for close to $3 billion...

Pakistan can raise $40 billion to $50 billion from international donors to recover from the current economic crisis, says a former World Bank vice-president Shahid Javed Burki. "There's an appetite in the world for helping Pakistan," he told Dawn newspaper. "What we need to do is to come up with credible programmes that can translate this interest into financial assistance." Pakistan announced on Saturday that Chinese bankers would be visiting soon to assess Pakistan's needs, and companies had pledged to invest $1 billion by next June...

The country's newly appointed economic adviser, Shaukat Tarin, allayed fears of an economic default by saying that there was no risk of Pakistan defaulting on international debts. "I am very confident that I have plans to make sure, whatever it takes that we should build our reserves and that we do not default," said Mr Tarin a day after returning from overseas visits to Washington and Beijing to drum up support for the Pakistani economy. "Now, there is no danger," he added.

Mr Tarin, said he planned to bridge a financing gap for the balance of payments deficit in the fiscal year ending June 30, 2009, mainly through other multilateral lenders including the World Bank and Asian Development Bank. Pakistan should be able to stand on its own feet after two years, and growth should be sustainable and production-led, rather than consumption-led and import induced, added Mr Tarin.
In a longer article also discussing possible IMF funding and the Pakistan-China nuclear deal, the Financial Times makes a similar allusion to additional financial help from the PRC for Pakistan:
Shah Mehmood Qureshi, the foreign minister, who has just returned from China, where he spent the previous four days accompanying president Asif Ali Zardari on a diplomatic visit, said China had agreed to widen the scope of its economic and nuclear energy cooperation with Pakistan. “They [China] have agreed to help Pakistan more than the resource gap” said Mr Qureshi without specifying the Chinese commitment in dollar terms.

A Pakistani finance ministry official said China had offered to help Pakistan avoid a default in its external payments with an initial offer of a soft loan of $500m. “This offer is open ended. When there is a tough crunch, the Chinese will help us” added the finance ministry official.
US influence at the IMF needs little discussion; it's Pakistan leaning more heavily on China that should intrigue us all in forthcoming days. Will China be trying to build regional influence via "bailout diplomacy"? Conversely, will Pakistan desire soft loans from the PRC more than conditionality-filled ones from the IMF? Perhaps Pakistan will just take from all comers as it cannot afford to be choosy right now.