World View: Pakistan Fails to Get Agreement for Bailout from IMF

Pakistani stocks rebound on Saudi financial deal

This morning’s key headlines from

  • Pakistan fails to get agreement from IMF for a bailout
  • Pakistan’s link to the FATF financial blacklist
  • Pakistan turns to its ‘friends’ for aid

Pakistan fails to get agreement from IMF for a bailout

Pakistan's prime minister Imran Khan and China's Premier Li Keqiang in Beijing earlier this month, with Khan begging for aid. (Getty)
Pakistan’s prime minister Imran Khan and China’s Premier Li Keqiang in Beijing this month, with Khan begging for aid. (Getty)

After two weeks of discussions early this month between Pakistan and the International Monetary Fund (IMF), Pakistan failed to get an agreement on securing a bailout package that would save the country from its balance of payments crisis. The talks ended inconclusively, with an agreement to meet again in January.

China has strongly encouraged the IMF to make a bailout loan available to Pakistan. Last month, China’s foreign ministry spokesman Lu Kang said, “As a member of the IMF, China supports the organization in making an objective evaluation of Pakistan based on professionalism and earnestly helping it properly address the current difficulty.”

However, the main area of disagreement with Pakistan stemmed from the IMF’s insistence that Pakistan fully disclose the terms of the loans made by China to Pakistan for the China Pakistan Economic Corridor (CPEC), part of China’s Belt and Road Initiative (BRI). This is a very sensitive subject for China. China’s has made loans to numerous countries across Asia and Africa, and China has insisted that the terms of these loans be kept top secret. Outside observers believe that China is engaging in “debt trap diplomacy” and exposing the terms of these loans would reveal the amount of leverage that China has on all these countries. In the case of Pakistan, even the central bank does not know the terms of the loan.

As we recently reported, the terms of China’s loan to the Maldives is becoming public thanks to a surprise election victory and change of administrations. The new president, Ibrahim Mohamed Solih, asked China’s ambassador Zhang Lizhong how much the Maldives owed to China, and he was handed an invoice for the shocking amount of $3.2 billion, many times more than Maldives could afford. This figure was so embarrassing to China that later denied that they denied that Zhang ever gave that figure. ( “24-Nov-18 World View — Maldives can’t determine how much money it owes to China”)

However, the IMF is demanding to know all the details of China’s loans to Pakistan before it will approve a bailout package. That is because a lot of the bailout money would end up going to China to pay off the CPEC investment. That is why China is so supportive of an IMF loan to Pakistan. And since most of the IMF money comes from U.S. taxpayers, American taxpayers would be paying for China’s infrastructure projects in Pakistan. Nikkei and Market Watch

Pakistan’s link to the FATF financial blacklist

This week is the tenth anniversary of the horrific 3-day terrorist attack on Mumbai, India, killing 126 people, injuring hundreds more, and gutting the Taj Mahal Palace Hotel, a major landmark for all of India.

It later turned out that the perpetrators were Lashkar-e-Taiba (LeT), a Pakistan-based terrorist group funded by Pakistan’s Inter-Services Intelligence (ISI) agency. LeT’s leader in the operation was Hafiz Saeed. Pakistan refused to condemn him or LeT, but kept him under house arrest for several years, under international pressure. Then in November 2017, Pakistan freed him with no trial and all charges dropped. As he left the court a free man, he was greeted by chanting crowds and rose petals.

The relevance of this story to Pakistan’s relationship with the IMF is that the IMF will not provide funding to a country on the blacklist of the Financial Action Task Force (FATF). The FATF is a 30-year-old international policy-making body concerned with money laundering and financing of terrorism and proliferation of weapons of mass destruction.

There are currently 11 countries on the FATF blacklist, including Pakistan. According to the October 2018 update, Pakistan has committed “to address its strategic counter-terrorist financing-related deficiencies,” and take numerous steps including the following:

(1) demonstrating that TF [terror financing] risks are properly identified, assessed, and that supervision is applied on a risk-sensitive basis;

(4) demonstrating that authorities are identifying cash couriers and enforcing controls on illicit movement of currency and understanding the risk of cash couriers being used for TF;

(8) demonstrating effective implementation of targeted financial sanctions (supported by a comprehensive legal obligation) against all 1267 and 1373 designated terrorists and those acting for or on their behalf, including preventing the raising and moving of funds, identifying and freezing assets (movable and immovable), and prohibiting access to funds and financial services.

In June, Pakistan agreed to tighten its compliance with anti-money laundering laws and counter-terror funding. In view of Pakistan’s previous sponsoring of terrorist organizations targeting India and Afghanistan, it is not surprising that Pakistan has no particular desire to fulfill that commitment, even though the IMF will not provide funding for a country on the FATF blacklist.

Finance Minister Asad Umar specifically addressed this question last week and responded: “The government is neither in a hurry to sign a deal with the IMF nor will it come under any pressure to take any decision which burdens the country’s economy and its people.”

The IMF has other requirements as well: raise taxes, raise electricity prices, tighten monetary policies, and allow a further depreciation in the value of the rupee currency. Asia Times and Pakistan Today and The News (Pakistan) and Financial Action Task Force (FATF)

Pakistan turns to its ‘friends’ for aid

Last month, Pakistan’s prime minister Imran Khan leveraged the bizarre death of Washington Post journalist Jamal Khashoggi in the Saudi Arabian embassy in Istanbul to obtain $6 billion in aid from Saudi Arabia. ( “25-Oct-18 World View — Pakistan’s ‘desperate’ Imran Khan attends Saudi investment summit amid Khashoggi crisis”)

However, even with that aid, Pakistan still needs an additional $12-15 billion in aid to survive the next year. Imran Khan has paid visits to both United Arab Emirates (UAE) and Qatar but apparently returned empty-handed from both visits.

So Pakistan has turned to its “all-weather friend,” China, whose friendship is “higher than mountains, deeper than oceans, stronger than steel, sweeter than honey, and dearer than eyesight.”

Khan visited China early this month, expecting a generous bailout package from China. But to everyone’s surprise, China flatly refused. Perhaps China feels that its refusal will force the IMF to provide a bailout, and then, as described earlier, the U.S. taxpayer will be paying China for CPEC, something that would delight the Chinese who would be getting sweet revenge for unfair deals forced on China after the Opium Wars in the 1800s.

So that brings us back to the IMF demands: make the details of China’s loans to Pakistan public and put procedures in place to end terror financing. It remains to be seen whether Pakistan is capable of meeting these demands, or if it even wants to. Dawn (Pakistan) and Lowy Institute (Australia) and Pakistan Today and and Bloomberg (24-Oct)

Related Articles

KEYS: Generational Dynamics, Pakistan, Imran Khan, International Monetary Fund, IMF, China, Lu Kang, China Pakistan Economic Corridor, CPEC, Belt and Road Initiative, BRI, Maldives Ibrahim Mohamed Solih, Zhang Lizhong, India, Lashkar-e-Taiba, LeT, Hafiz Saeed, Inter-Services Intelligence, ISI, Asad Umar, Financial Action Task Force, FATF, Saudi Arabia, Jamal Khashoggi, Qatar, United Arab Emirates, UAE
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