Why is US opposing an IMF loan to Pakistan?

Shahid Mehmood explains the global stakes at play in Pakistan's current economic crisis

Why is US opposing an IMF loan to Pakistan?
Everybody, especially economists, knew that this one was coming: Pakistan will have to go to the International Monetary Fund (IMF) after the departure of Ishaq Dar. But nobody, even the most astute, predicted the United States’ opposition to the probable IMF loan to Pakistan. It came out of nowhere, a bolt from the blue that took everyone by surprise. If this move and its explained rationale (by US officials) sound perplexing, its topped up by the rather hilarious efforts from various quarters within Pakistan in terms of one-upmanship, and an attempt at hollow bravado that amounts to nothing.

Beneath the veneer of opposition lies a complicated tale, one that we must understand in historical, economic and geopolitical context in order to properly understand the situation. The following lines are aimed at parsing through the fog in order to clarify the scene for the reader and the policymakers.

We start with noticing that China has been dishing out loans and investing substantially in many places around the globe (between 2000 and 2014, China provided $354 billion in overseas financial support). Pakistan is the latest beneficiary under the China Pakistan Economic Corridor (CPEC) initiative (it would probably be more correct to label it as debt since it will ultimately have to be returned). Put another way, Chinese have been generously extending dollar denominated credit.
Nations can now turn to China rather than US or IMF. Heeding history's lesson, Chinese leadership is well aware that credit will play the most important role in its aims of expanding its global influence, which explains its generous credit provision around the world

But why is this worrying the US? One answer comes from Steve Mnuchin, the US Treasury Secretary. At G-20 conference in March and later at an IMF meeting in April, he voiced concerns about the Chinese loans and their terms, danger of countries defaulting on Chinese loans, and that IMF loans would be used to repay the Chinese loans (surprisingly, nobody in Pakistan took note at that time). He in fact proposed that China should join the Paris club, a consortium specialising in loaning money to developing nations.

Unfortunately, Mnuchin’s explanation does a poor job at masking the real intentions. Readers will have to appreciate the fact that credit has been used as a stupendous weapon for thousands of years. It is beyond the scope of the article to revisit all that history, but suffice to say that from arm-twisting to getting favours, credit has done the trick for dominant powers of their age. US is the dominant power of our times and it has successfully enforced its will upon weaker nations in order to get what it wants. Pakistan is a shining example of this, with the US using its demand for dollars as a hard bargaining chip (remember the famous call after 9/11, which led to overnight change in our entire foreign policy?). In short, it has used the power of credit to bully nations into submission, and institutions like IMF are a comparatively respectable way to employ bullying tactics.

But now there is another player in town: China. Nations can now turn to China rather than US or IMF. Heeding history’s lesson, Chinese leadership is well aware that credit will play the most important role in its aims of expanding its global influence, which explains its generous credit provision around the world. An alarmed US watches this with consternation. With Syria proving that its military options now reduced considerably (the Russians checkmating them brilliantly), the most credible option for the US to exert its influence now remains the credit option. But this option is now being eroded by China. Countries, once desperate to do anything for the US in order to get their hands on dollars, can now avail the Chinese option.

These countries include Pakistan, which is now largely dependent upon Chinese credit to meet its demand for dollars. And this is precisely why Uncle Sam feels uneasy. It wants to bully Pakistan (through IMF) back into its own sphere of influence. After all, where would you find such a dependable partner (nuclear armed), willing to do Uncle Sam’s bidding without asking much in return? The US opposition to IMF loans to Pakistan is thus part of an attempt to resuscitate its loosening grip. But now, ‘times are a changin’, and Uncle Sam doesn’t like it. Moreover, as in case of North Korea coming to the talking table, China has shown that it can also twist a few arms courtesy of its financial prowess. This is the reason that Mnuchin suggested China joining Paris Club, so that Chinese liberty in giving out loans can be reduced.

Let’s now turn our gaze to Pakistan’s reaction. The official reaction was as expected, a futile attempt to somehow assure the world that we still matter. But the most perplexing and strange reaction came from Asad Umar, the finance minister designate. He advised the US to worry about ‘Chinese loans’ that the US has to repay.

You see, Chinese ‘loans’ to US are not loans! They are, in fact, an investment in the US treasuries. Without going into the complexities, the fact of the matter is that this is a win-win situation for both the US and China. For China, they are investing their hard-earned foreign exchange in the world’s safest (and the most in-demand) asset, and earning dollars without losing a penny. The Chinese economic miracle has a substantial imprint of trade on it, and dollar is the medium that oils the wheels of the international trade engine. Why would they want to give up on it?

For the Americans, there’s nothing better than the sight of all those dollars leaving the American shores only to return again. In simple words, the world is financing the workings of the American government at ultra-cheap rates (the US treasuries pay hardly a percent in terms of interest). It is a much better option than, say, raising taxes on its citizens that could be politically very unpopular. And mind you, even if a situation arises (highly unlikely) that Chinese demand it back, it won’t trouble the Yankees since the debt is denominated in their own money, which they can print and collect and repay without much hassle. As the English would say, it’s much ado about nothing.

Thus, both the Chinese and the Americans are quite happy at this arrangement, and they’ll probably let out a yawn at Asad Umar’s comments. For Pakistan economy’s sake, I sincerely hope that the finance minister’s (designate) comments were merely political marketing rather than serious commentary. Otherwise, this bodes ill for an economy already in doldrums. Also, he should be able to distinguish that unlike us, Americans did not plead with the Chinese to invest. Rather, the Chinese took the initiative themselves. If we find ourselves persistently short of dollars (pushing us to run to the likes of IMF), it is our own fault and not a Jewish or American conspiracy. And mind you that ‘agricultural’ Pakistan is now importing a huge quantity of food stuff too, paying up in dollars. So much for managing a nuclear armed, ‘agricultural’ nation!

Let’s be clear then. Beyond the US opposition to IMF loans for Pakistan lies a bevy of reasons that encompass economics and statecraft. And let’s also be clear that going to IMF is our own compulsion rather than some conspiracy. If Pakistanis want an end to these kinds of troubles, there is little alternative but to do things differently. Otherwise, we will keep receiving instructions in the garb of sermons of piety.

The writer is an economist and can be reached on Twitter @ShahidMohmand79

The writer is an economist. He tweets at @ShahidMohmand79