China in Quandary as Pakistan Faces Debt Default After Steep Fall in Forex Reserves

Watching warily Pakistan plunging into the worst economic crisis with prospects of defaulting on foreign loans, China which holds Islamabad’s largest debt on Monday said it backed measures taken by its “all-weather friend” to tide over the disastrous situation and hoped it will, in the end, pull through.

Pakistan’s current account deficit shrank 90.2 per cent to USD 0.24 billion in January from USD 2.47 billion in the same month last year, according to the data shared by the State Bank of Pakistan (SBP) on Monday, as import restrictions continue to persist amid a balance of payments crisis that has brought the country on the verge of default.

Compared to December’s USD 0.29 billion, the deficit decreased by 16.55 per cent, the Dawn newspaper reported on Monday.

The deficit was recorded as import restrictions continue to persist amid a balance of payments crisis that has brought the country on the verge of default, it reported.

Analysts say Pakistan’s economic crisis coming close to that of Sri Lanka’s and perhaps followed by deeply indebted African nations is turning out to be a crisis of sorts for China itself as it doled out huge loans criticised by many as predatory in nature with demands to write off could have consequences for Beijing’s own slowing down of the economy.

Cash-strapped Pakistan was optimistic that China will not allow it to go down the Sri Lanka way of declaring complete insolvency. According to the International Monetary Fund (IMF) data, China holds roughly USD 30 billion of Pakistan’s USD 126 billion in total external foreign debt.

This is thrice its IMF debt (USD 7.8 billion) and exceeds its borrowings from the World Bank and Asian Development Bank combined, according to Dawn’s report.

In a stunning remark on Sunday, Pakistan’s Defence Minister Khawaja Asif said Pakistan has already defaulted.

“You may have learned that Pakistan is going bankrupt or that a default or meltdown is taking place. It has already taken place. We are living in a bankrupt country,” he said.

Asked for its reaction to Asif’s remarks, the Chinese Foreign Ministry, in a written response to PTI here, said China sympathises with Pakistan. “As an all-weather strategic cooperative partner and “hard-core” friend, China sympathises with Pakistan’s current difficulties and supports Pakistan in taking active measures to deal with it”, it said.

“China is and will continue to firmly promote China-Pakistan mutually beneficial cooperation and provide all necessary support for Pakistan to achieve stability and sustainable development”, it said but did not provide any details.

“We believe that Pakistan will be able to overcome difficulties and achieve stable economic and social development”, it said.

China is already in quandary about how to extend support to Sri Lanka which has already defaulted on its USD 51 billion external debt which included a 20 per cent loan owed to China.

After India, last month issued a letter to the IMF giving required assurances for Sri Lanka to get the USD 2.9 billion bailout package, China’s EXIM Bank has issued a letter granting Colombo a two-year moratorium on repayment and agreeing with the IMF’s extended fund facility (EFF) amid doubts that it may not be enough for it to secure the loan.

On Monday, Chinese Foreign Ministry spokesperson Wang Wenbin told the media here that the Export-Import Bank of China in its letter to the IMF said that it is going to provide an extension on the debt service due in 2022 and 2023.

This means “Sri Lanka will not have to repay the principal and interest due of the Bank’s loans during the above-mentioned period, so as to help relieve Sri Lanka’s short-term debt repayment pressure”, he said Meanwhile, the EXIM Bank would like to have friendly consultation with Sri Lanka regarding medium-and-long-term debt treatment in this window period and will make its best efforts to contribute to the debt sustainability of Sri Lanka, Wang said.

“China will continue to support relevant financial institutions in actively working out the debt treatment” and work with relevant countries and international financial institutions to jointly play a positive role in helping Sri Lanka navigate the situation, he said.

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(This story has not been edited by News18 staff and is published from a syndicated news agency feed)

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