Trapped between China and the United States
By: Salman Rafi Sheikh
On June 20, after several rounds of talks failed to reach an agreement, crisis-hit Pakistan formally requested Washington’s help in securing favorable treatment from the International Monetary Fund for a bailout. the country’s dire fiscal situation – at the potential cost of a distancing of its relationship with China.
The request to the IMF came amid rapidly falling foreign exchange reserves (less than US$9 billion), a plummeting rupee (Rs215: US$1) and China’s refusal to provide a additional financial assistance to what had previously been described as his “all-time” friend. In addition to an economy reeling towards bankruptcy, there is the rapidly rising cost of living due to steadily rising oil and diesel prices as well as an electricity crisis, which is in many ways linked to the Chinese Independent Power Plants (IPPs) operating in Pakistan.
Earlier in June, the IPPs refused to supply electricity unless Pakistan paid 340 billion rupees ($1.5 billion) in advance. The cash-strapped government’s inability to pay more than 50 billion rupees led China’s IPPs, which are part of the China-Pakistan Economic Corridor (CPEC), to shut down their factories, causing massive power outages in across Pakistan and putting the new government under enormous political pressure.
The shutdown came despite major violations – and even corruption – of Chinese companies involved in the power sector. According to the 2021 report of the government-formed “Mohammad Ali Committee”, Chinese companies openly defy the stipulated maximum profit ratio of 15% and make profits of up to 50-60%, one of the main reasons for which electricity prices have skyrocketed in Pakistan in recent years.
This is one more reason why the IMF asked Pakistan to renegotiate the electricity tariff with the Chinese IPPs in order to lower the prices paid by consumers. The IMF has pushed Pakistan to renegotiate particularly because one of the fund’s main requirements to unlock the agreed $8 billion bailout is to raise electricity prices. With Pakistani authorities reluctant to raise prices too much, the IMF asked Pakistan to renegotiate with Chinese IPPs to bring down the overall cost of electricity and reduce circular debt.
As revealed by various official sources, Pakistan was unable to pay the 340 billion rupees to the Chinese due to IMF pressure not to pay without renegotiating prices as well as illegal profiteering.
The complexity surrounding the role of IPPs as well as Pakistan’s negotiations with the IMF reflects the real situation between Pakistan and China on the one hand and Pakistan and the United States on the other. Pakistan’s growing US tilt, a direct consequence of CPEC’s failure to generate the expected “win-win” growth for Pakistan, has led China to redefine its ties with Pakistan; hence Beijing’s refusal to provide additional loans.
The “CPEC backlash” is not exclusive to Pakistan. In Nepal, for example, dozens of Chinese companies involved in infrastructure and energy were recently banned for negligence and various wrongdoings. The Chinese, as usual, blamed the new Nepalese government for all the troubles. In much of the world, the Covid-19 crisis has impoverished governments, with as many as 30 political banks, commercial banks and Chinese companies lending to African companies or governments seeking debt relief, which usually involves extending repayment periods, reducing interest rates and seeking to increase cash flow with varying success rates according to international agencies.
In Sri Lanka – which owes China around US$7 billion – Chinese projects have completely failed to generate revenue, leading Colombo to hand over the port of Hambantota to the Chinese on lease for 99 years. Even though China has financial interests in Sri Lanka, it has refused to offer any assistance to Colombo amid the current economic crisis, as Beijing has not accepted the Rajapaksa government’s request to restructure debt servicing. In Pakistan too, the expected revenue generation from Gwadar – which is already leased to the Chinese for the next 40 years – is marginal at best. In fact, Beijing’s exploitation of the Gwadar fisheries has recently led the residents – mostly fishermen – of Gwadar to organize a mass movement against China.
That other CPEC projects, too, have failed to generate the expected level of growth and are in fact contributing to Pakistan’s problems by extracting revenue via illegal profit margins, is hardly a surprise.
For the IMF, which is closely aligned with US intentions despite its putative international role, however, this state of affairs is an opportunity to wean Pakistan as much as possible from China to pave the way for Pakistan’s meaningful participation. to any future anti-China action. regional configuration that Washington seeks to organize in the Indo-Pacific region.
The IMF succeeded in that Pakistan allocated only 20-25 billion rupees to CPEC in the recent budget announced the second week of June, a meager amount compared to the hundreds of billions of rupees needed to revive and complete his many projects well. Pakistan thus turns the CPEC narrative from an economic lifeline to a marginal project.
But Washington’s interests in Pakistan are not simply anti-Chinese; they are also linked to Afghanistan in many ways. When the head of the powerful Pakistani intelligence service Inter-Services Intelligence (ISI) recently visited the United States, the main objective of these talks was to obtain Pakistan’s help in organizing an anti-terrorism resistance movement. Taliban led by the National Resistance Front (NRF) of Ahmad Masood and Amrallah Saleh.
The main leaders of this movement are currently based in neighboring Tajikistan, a country itself opposed to the violent – and exclusive – takeover of Afghanistan by the Taliban and the Islamist threat it poses to the whole. of the neighborhood.
As various Pakistani diplomatic sources have confided, Washington indeed wants Pakistan to modify its policy vis-à-vis the Afghan Taliban at a time when India, Pakistan’s great rival, shows signs of developing ties with them.
A major regional reconfiguration may therefore be underway. With Washington, which is the largest shareholder and wields considerable influence over the fund, agreeing to intervene on Islamabad’s behalf to help finalize a deal, a long-term deal altering old fault lines in Pakistani relations and China seems well advanced for the long-term and short-term advantage of Washington and Islamabad, respectively.
This will be critical for the development of Pakistan-US relations as Islamabad has requested the IMF not only to resume disbursements but also to expand and prolong the program. Analysts and politicians see the deal as a significant pro-Western positioning of Pakistan’s foreign policy direction. It is therefore possible to write on the wall for a major restructuring (geopolitical and economic) away from Beijing and towards Washington.
This is also apparent from Pakistan’s efforts to effectively mitigate – and even neutralize – former Prime Minister Imran Khan’s supposedly “pro-Russia” stance. Pakistan, as things stand, has lost its appetite for Moscow and/or buying “cheap” Russian oil.