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Trump administration warns IMF against bailout for Pakistan

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News Analysis |

The Trump administration has warned the International Monetary Fund (IMF) from issuing a potential financial bailout for Pakistan’s floundering economy.

In an interview with CNBC, U.S. Secretary of State; Mike Pompeo said, “Make no mistake, we will be watching what the IMF does.” Reflecting the United States’ protectionist stance under the Trump administration, Pompeo added, “There’s no rationale for IMF tax dollars, associated with American dollars that are part of the IMF funding, to go to bail out Chinese bondholders or China itself,”

A lot depends on how tacitly Imran Khan’s new cabinet will handle the diplomacy involved. Given the spate of well-versed figures up for nomination, the chances are not too bad for Pakistan’s economy.

Pakistan having just conducted its most transparent and fair elections to date is also struggling to dodge a currency crisis thanks to morbidly corrupt outgoing government. The new government will be undertaking various challenges of which stabilizing the economy will be of vital importance. All indicators and observers predict that the new government will end up visiting the IMF for Pakistan’s second bailout since 2013 to restock its foreign currency reserves.

Read more: IMF bailout on the cards for Pakistan’s next government: analysts

Pompeo’s address hints at OBOR’s flagship project; the China Pakistan Economic Corridor (CPEC) worth around US$ 61 billion for which Pakistan had drawn numerous loans from China. Already around US$ 5 billion in loans from Chinese banks have gone into major infrastructure projects across Pakistan yet the economy is still US$ 1 billion short.

In order to avoid defaulting on loans in the next couple of months, Pakistan needs around US$ 3 billion to pay back to the IMF and China as well as the World Bank. The Financial Times mentioned that the new government is being advised by financial experts on its options of which an IMF bailout of up to $12 billion is the most viable.

All indicators and observers predict that the new government will end up visiting the IMF for Pakistan’s second bailout since 2013 to restock its foreign currency reserves. 

According to Reuters, an IMF spokesperson responded on Tuesday to Pomepo’s address by saying that no request for a fund arrangement has been submitted by Pakistani authorities so far and the new government has not yet exhibited any such intentions. Mr. Pompeo mentioned that he is not averse to working with the new Pakistani leadership and despite his statements would welcome engagement in a manner that is bilaterally beneficial for both countries.

The Pakistan Tehrek-e-Insaf which swept the July 25 polls are most likely to form the new government for which officials will be taking oath in August. All indicators point towards the new government approaching the IMF for what would amount to be the country’s 13th bailout.

Read more: Amid rising macroeconomic instability, IMF cuts down Pakistan economic growth to…

Reason being that foreign investment and macro variables are at critical levels, debt is rising and the export sector is performing poorly, according to Sehar Tariq at the US Institute of Peace. According to media sources, China has consented to add some additional foreign currency on top of its CPEC funding which has had a positive affect with the Rupee rising against the dollar at record rate in one week.

It is worthy to mention that over 20% of America’s debt is already owned by China and despite Pompeo’s gesturing, the cards are not completely off the table. A lot depends on how tacitly Imran Khan’s new cabinet will handle the diplomacy involved. Given the spate of well-versed figures up for nomination, the chances are not too bad for Pakistan’s economy.