U.S. Warns IMF Against Pakistan's Bailout

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U.S. Warns IMF Against Pakistan's Bailout

U.S. Warns IMF Against Pakistan's Bailout

Image Attribute: A file photo of U.S. Secretary of State Mike Pompeo / REUTERS

On July 30, 2018, U.S. Secretary of State Mike Pompeo has warned against providing an International Monetary Fund (IMF) bailout for Pakistan's new government that includes funding to pay off Chinese lenders. The country needs about US$ 3 billion in the next few months to avoid defaulting on loans from IMF, China, and the World Bank.

In an interview with CNBC television, Pompeo said the United States looked forward to engagement with the government of Pakistan's expected new prime minister, Imran Khan, but said there is "no rationale" for a bailout "ideas" that pays off Chinese loans to Pakistan.

"Make no mistake. We will be watching what the IMF does," Pompeo said. "There's no rationale for IMF tax dollars, and associated with that American dollars that are part of the IMF funding, for those to go to bail out Chinese bondholders or China itself," Pompeo said.

However,  China on Tuesday said that it expects the IMF to follow its own set of rule to provide funds to countries. The comment came from Chinese Foreign Ministry Spokesperson Geng Shuang’s in response to Pompeo’ statement.

All indicators suggest the Pakistan Tehrek-e-Insaf's government — which is likely to take oath next month — will immediately have to approach the IMF for what would be the country's 13th bailout from the fund. The Financial Times reported on July 29 that senior Pakistani finance officials were drawing up options for Khan to seek an IMF bailout of up to US$ 12 billion.

“Exports are down, debt is up, the macro indicators are pretty poor,” says Sehar Tariq with the US Institute of Peace.

Till date, Pakistan has had 14 IMF financing programs since 1980, according to fund data, including a US$ 6.7 billion three-year loan program in 2013.

An IMF spokeswoman said the international lending agency has not as yet received an aid request from Pakistan nor had discussions with Pakistani officials about their intentions. Pakistan has had 14 IMF financing programs since 1980.

Pakistan is struggling to avert an on-going currency crisis that has presented the new government with one of its biggest challenges. Many analysts expect that another IMF bailout, the second in five years, will be needed to plug an external financing gap. 

Pakistan, which has taken around US$ 5 billion in loans from China and its banks to fund major infrastructure projects such as OBOR's flagship project China Pakistan Economic Corridor (CPEC), had sought another US$ 1 billion in loans to stabilize its plummeting foreign currency reserves — which economists have warned the country will face difficulty in paying back. The other option may be further borrowing from China.

U.S. officials, including Treasury Secretary Steven Mnuchin, have criticized China's infrastructure lending to developing countries like Pakistan, arguing that it has saddled them with unsustainable debt.

The US$ 57 billion China-Pakistan Economic Corridor, a series of port and rail improvements associated with China's One Belt One Road infrastructure push, has led to massive imports of Chinese equipment and materials, swelling Pakistan's current account deficit.

Western officials say that while Pakistan has taken on huge debts to finance the projects, China's investment has gained access for China's military to Pakistan’s Gwadar Sea Port, which is strategically placed west of India.

"We aspire to a regional order -- independent nations that can defend their people and compete fairly in the international marketplace," Pompeo said during a speech on the Indo-Pacific region on July 30.

"We will help them. We will help them keep their people free from coercion or great power domination," he said.

With reporting by CNBC, The Washington Examiner, Reuters, and RFE/RL