It’s time to ask China for another favour. It turns out that the $3 billion trade facility, which the Chinese first extended in 2011 and then re-extended repeatedly at our request, is due to expire once again next year. That makes this the time when we approach Beijing, as usual, and ask for yet another rollover. The Chinese have truly been our dearest friends and have always come to our aid, of course, but there does seem some concern in Islamabad that they might not be willing to play along like this for much longer. The thing is that this money comes from the bilateral currency swap agreement (CSA) between the State Bank of Pakistan (SBP) and the People’s Bank of China (PBC), which was meant to finance direct investment, provide short-term liquidity, and promote bilateral trade in local currencies. All of those are very important things, especially the last one, since it would have diminished the importance of the dollar for Pak-China commerce. Beijing has a number of such arrangements with Moscow and the time was right, just ahead of CPEC, for Pakistan to learn from its neighbour’s experiences.
But we used the money to pay back interest on old loans and shore up our reserves instead. And every time we asked for and got a rollover we used the funds for the exact same purposes. Now there’s only so long anybody, even all-weather friends, can be expected to throw money into a black hole. It’s not as if our habits have got any better. In fact the existing $12.1 billion worth of official foreign currency reserves, which the government is very happy about, have been built largely by borrowing, including borrowing from commercial banks. That alone shows how this government, just like previous governments, has simply failed in attracting what is referred to as non-debt creating forex inflows in any substantial manner. And there’s nothing to suggest that this borrow-to-survive way of running the country is going to change anytime soon. That realisation, it is beginning to look from news reports, is what might have finally rung alarm bells in Beijing about the way the trade facility is being handled.
Fortunately, the Chinese are too wise to take any hasty steps and they are unlikely to pull the plug on any deals without first sharing their concerns with Islamabad. Yet even the best case scenario, from our point of view, would only amount to delaying the inevitable. It’s for a reason that economists compare unmanageable debt with a ticking time bomb which, if not defused in time, simply explodes with very obvious consequences. And rollovers like the ones we’re so used to requesting and getting make the long-term situation worse as well. Easy money is good for rotating repayment priorities and making the reserves look pretty, but it comes at a stiff cost. Just last year Pakistan paid China a good Rs20.5 billion in interest for this facility. Each time it is renewed the interest requirement only becomes steeper of course.
If, however, China does not agree to another rollover then the government would suddenly have to take dollars from its precious reserves and buy 20 billion yuan to pay back. That would no doubt give the reserves a good haircut and then where would we stand? Let’s not forget that the International Monetary Fund (IMF) programme is still stalled and will not get back on track till the government agrees to higher electricity tariffs and introduction of a mini-budget to raise taxes, which the prime minister has resisted so far because of already high inflation, so there could hardly be a worse time for reserves to come under pressure like this. Then there’s the second wave of the pandemic and the possibility of another lockdown to worry about. Surely, that would only increase our borrowing needs.
There is an urgent need to frame long-term economic policies designed to lessen the country’s dependence on debt to keep functioning. The foreign ministry, even the prime minister himself, must no longer be forced to conduct diplomacy of rollovers because the finance ministry cannot think outside debt. Almost two-and-a-half years into the cycle, this government still seems confused about economic policy. Unless it gets its act together very quickly, it will also burden the country and everybody in it with harsh repayment obligations and a very bleak future.brecorder.com/news/40031365/a-chinese-favour
A Chinese favour : edit in Business Recorder, Nov 08, 2020
It’s time to ask China for another favour. It turns out that the $3 billion trade facility, which the Chinese first extended in 2011 and then re-extended repeatedly at our request, is due to expire once again next year. That makes this the time when we approach Beijing, as usual, and ask for yet another rollover. The Chinese have truly been our dearest friends and have always come to our aid, of course, but there does seem some concern in Islamabad that they might not be willing to play along like this for much longer. The thing is that this money comes from the bilateral currency swap agreement (CSA) between the State Bank of Pakistan (SBP) and the People’s Bank of China (PBC), which was meant to finance direct investment, provide short-term liquidity, and promote bilateral trade in local currencies. All of those are very important things, especially the last one, since it would have diminished the importance of the dollar for Pak-China commerce. Beijing has a number of such arrangements with Moscow and the time was right, just ahead of CPEC, for Pakistan to learn from its neighbour’s experiences.
But we used the money to pay back interest on old loans and shore up our reserves instead. And every time we asked for and got a rollover we used the funds for the exact same purposes. Now there’s only so long anybody, even all-weather friends, can be expected to throw money into a black hole. It’s not as if our habits have got any better. In fact the existing $12.1 billion worth of official foreign currency reserves, which the government is very happy about, have been built largely by borrowing, including borrowing from commercial banks. That alone shows how this government, just like previous governments, has simply failed in attracting what is referred to as non-debt creating forex inflows in any substantial manner. And there’s nothing to suggest that this borrow-to-survive way of running the country is going to change anytime soon. That realisation, it is beginning to look from news reports, is what might have finally rung alarm bells in Beijing about the way the trade facility is being handled.
Fortunately, the Chinese are too wise to take any hasty steps and they are unlikely to pull the plug on any deals without first sharing their concerns with Islamabad. Yet even the best case scenario, from our point of view, would only amount to delaying the inevitable. It’s for a reason that economists compare unmanageable debt with a ticking time bomb which, if not defused in time, simply explodes with very obvious consequences. And rollovers like the ones we’re so used to requesting and getting make the long-term situation worse as well. Easy money is good for rotating repayment priorities and making the reserves look pretty, but it comes at a stiff cost. Just last year Pakistan paid China a good Rs20.5 billion in interest for this facility. Each time it is renewed the interest requirement only becomes steeper of course.
If, however, China does not agree to another rollover then the government would suddenly have to take dollars from its precious reserves and buy 20 billion yuan to pay back. That would no doubt give the reserves a good haircut and then where would we stand? Let’s not forget that the International Monetary Fund (IMF) programme is still stalled and will not get back on track till the government agrees to higher electricity tariffs and introduction of a mini-budget to raise taxes, which the prime minister has resisted so far because of already high inflation, so there could hardly be a worse time for reserves to come under pressure like this. Then there’s the second wave of the pandemic and the possibility of another lockdown to worry about. Surely, that would only increase our borrowing needs.
There is an urgent need to frame long-term economic policies designed to lessen the country’s dependence on debt to keep functioning. The foreign ministry, even the prime minister himself, must no longer be forced to conduct diplomacy of rollovers because the finance ministry cannot think outside debt. Almost two-and-a-half years into the cycle, this government still seems confused about economic policy. Unless it gets its act together very quickly, it will also burden the country and everybody in it with harsh repayment obligations and a very bleak future.brecorder.com/news/40031365/a-chinese-favour
Published in Pak Media comment and Pakistan