Pakistan's Prime Minister Imran Khan wrapped up a four-day visit to China on Monday without achieving his primary goal of securing Chinese financing. As the South Asian nation scrambles for external help, it may have no choice except to approach the International Monetary Fund for what would be its second bailout in five years.
Beijing is committed to assisting Islamabad but more talks are needed, Chinese Vice Foreign Minister Kong Xuanyou was quoted as saying on Saturday after a meeting between Khan and Chinese Premier Li Keqiang.
Pakistan's economy, however, may not be able to wait much longer. The country urgently needs a capital boost in order to avert a looming balance of payments crisis. Foreign reserves held by the central bank dropped below $8 billion in late October, raising concerns about Islamabad's ability to finance monthly import bills.
Beijing is one of Islamabad's closest allies and a major investor, having loaned the South Asian nation around $4 billion in the 2017-2018 fiscal year that ended in June, according to multiple reports.
It's decision to hold off on more loans — it's most recent one, worth $2 billion, came days following Khan's election in July — may be tied to its trade spat with Washington, suggested Sahar Khan, a visiting research fellow at the Cato Institute. China, the world's second largest economy, has experienced tightened liquidity conditions recently amid currency declines and pressure from U.S. President Donald Trump's tariffs.
Chinese President Xi Jinping has also committed billions to building the China-Pakistan Economic Corridor. The CPEC is a network of transport, energy, industrial and agricultural projects from the Pakistani city of Gwadar to the Chinese region of Xinjiang.
"China's refusal to agree to anything specific during Khan's trip is a bit of a setback," said Michael Kugelman, deputy director of the Asia program and senior associate for South Asia at the Wilson Center. But given rising concerns in Pakistan about the CPEC, Xi's government may be signaling "that it's time for Pakistan to figure out how to make things work," he added.
Abdul Razak Dawood, Pakistan's cabinet member for commerce, industry and investment, told the Financial Times in September, that he believes CPEC should be put on hold for a year, adding that Chinese companies in the country held an undue advantage over local firms.
Even before Khan's trip to China, his government was widely expected to ask the IMF for a bailout. But the Pakistani premier, who delivered a keynote address at the China International Import Expo on Monday, had expressed a preference to seek funding from friendly countries first.
The Islamic Republic already received a $6 billion loan package from Saudi Arabia last month — a deal seen by some as Riyadh's way of keeping its friends close amid international pressure over the killing of journalist Jamal Khashoggi. A prominent critic of the Saudi government, Khashoggi was killed after entering the Saudi consulate in Istanbul on Oct. 2. Some U.S. lawmakers and and Turkish officials have said that Saudi Crown Prince Mohammed bin Salman ordered the murder, but Riyadh denies those allegations.
"It is definitely linked to Khashoggi's murder," said Uzair Younus, director of South Asia practice at strategy firm Albright Stonebridge Group. "The Saudis have basically given $6 billion in assistance as a 'thank you' to the Pakistani government for standing by them during a time of crisis."
"The deal likely came with an unstated expectation that Pakistan will need to reassert its allegiance to the Saudis in the Saudi Arabia-Iran rivalry, despite the new Pakistani government's robust expressions of neutrality," added Kugelman.
But without more external financing, an IMF bailout for Pakistan appears inevitable. Many economists argue that IMF loans create a debt trap for emerging economies but the same has also been said about Chinese investment.
"Islamabad wanted to get some degree of financial support from a bilateral partner so that it can bring down its ask of the IMF," according to Kugelman. "The way Islamabad sees it, the less it needs to ask from the IMF, the more leverage it may have at the negotiating table with the Fund."
The United Arab Emirates could also be a potential lifeline for Khan's administration following reports that both countries held discussions about a deferred oil payment facility, Pakistani media reported in late October.
"Regardless of whether the Chinese or the Emiratis provide assistance, Pakistan will enter IMF negotiations for another bailout," said Younus. "The size of this bailout will be determined by what assistance can be gained from the Chinese and the Emiratis."
There's still a chance Beijing could eventually come around.
The relationship between Chinese and Pakistani leadership remains nascent so "assistance will flow only after the Chinese believe that they have a strong partner in the PTI government that is ready and capable of pushing through more projects," Younus said, referring to Khan's ruling Pakistan Tehreek-e-Insaf party.
Any influx of Chinese funds, however, are likely to come with strings attached.
Further complicating the matter is U.S. objection to a potential IMF bailout.
Speaking to CNBC earlier this year, U.S. Secretary of State Mike Pompeo objected to an IMF bailout for Islamabad, saying the funds would bail out Chinese bondholders or China itself.
"Pakistan represents a litmus test of all future cases in which the IMF, United States, China, and any emerging market country are all involved," analysts at the Center for Strategic and International Studies said in a recent note. "Depending on how Beijing chooses to navigate Pakistan's financial crisis, China may soon find itself responsible for rectifying the debt burdens of Zambia and many other [Belt and Road] countries."
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