PM’s China visit ahead of FY2024-25 budget

12 June 2024

Published in: Business Recorder

Prime Minister Shehbaz Sharif-led delegation to China returned after a five-day visit and issued a press release highlighting an entire range of agreements on cooperation in all sectors, though none that were contractually binding.

Supporters of the government legitimately point to Chinese government’s policy not to publicise its commitments in terms of total support or the interest rate applicable on any such support, or indeed whether a sovereign guarantee will be required as collateral.

Critics of the government, however, claim that China may refuse to share details of the type of loan and its associated conditions, yet it did not hesitate in announcing 46 billion-dollars investment with key projects that were envisioned under the China Pakistan Economic Corridor (CPEC) umbrella in 2015 announced – information that is missing in the recent press release.

There is intense speculation in the federal capital that the five-day visit to China, that led to a deferment of the day that the budget would be presented to parliament, may have been due to the insistence on “prior conditions” by the International Monetary Fund (IMF) team after completion of their visit to the country tasked to initiate negotiations on a “successor” to the Stand-By Arrangement programme and, perhaps, the amount of Chinese investment inflows that would support the budgeted growth projections.

This claim seeks credence from the end of mission press release uploaded on the IMF website dated 24 May stating, “the mission and the authorities will continue policy discussions virtually over the coming days aiming to finalise discussions, including the financial support needed to underpin the authorities’ reform efforts from the IMF and Pakistan’s bilateral and multilaterals partners.”

Chinese assistance is considered critical with respect to the envisaged bilateral partners support, the other two critical countries being Saudi Arabia and the United Arab Emirates, and envisions a three-fold support: (i) “roll over” of the 6 to 7 billion dollars parked in the State Bank of Pakistan till the end of the next programme which is being projected at between three and four years – if this has been agreed it is very probable that the Chinese government will convey its decision directly to the IMF as on previous occasions; (ii) projected further investment inflows, given the 500 billion rupee plus pending repayments (in dollars) that Pakistan contractually agreed to under CPEC projects that are operational; and (iii) security of its citizens engaged in CPEC projects which necessitated the presence of the Chief of Army Staff in the delegation.

The budget will now be presented tomorrow, on the 12th, and there are those who claim that this reflects that the Chinese assurances that were sought by the Pakistani delegation were extended and conveyed to multilaterals, particularly the IMF.

This may be the case, however, it is also relevant to note that the government could not postpone the budget for much longer because its approval by parliament is necessary before 1st July, the start of next fiscal year.

The budget session was initially called on 6 June but it was put off for later. All key required meetings preparatory to presentation of the budget in parliament have been delayed.

National Economic Council (NEC) meeting which as per Article 156 of the Constitution is tasked to review the overall economic condition of the country and advise the Federal Government and the provincial governments, formulate plans in respect of financial, commercial, social and economic policies; has only met yesterday after having been constituted few days earlier. The budget strategy paper has also not been shared with parliament though perhaps this could be because a decision is awaited on the reserved seats.

In this scenario, the Prime Minister and the Finance Minister went to China, together with a host of other ministers and a rather heavy contingent of private sector entrepreneurs.

Pakistan’s economy remains extremely fragile in spite of claims to the contrary and the climate for domestic investment, leave alone foreign investment, is poor for different reasons; many of which have to do with flawed policies of the past.

Pakistan’s credit rating has not improved in spite of disbursement of the final tranche of the Stand-By Arrangement as previous governments, including the caretakers, continued to borrow heavily from the domestic market to fund current expenditure, which crowded out private sector borrowing and kept the country out of the international equity market.

To increase leverage with the foreign investors and multilaterals/bilaterals the government must not only freeze the current expenditure to last year’s level (budgeted at 13.3 trillion rupees but actually trim it further by 2 trillion rupees to 11.3 trillion rupees) – a trimming that would reduce the need to borrow from abroad while giving the government enough time to improve the macroeconomic fundamentals which would then attract foreign direct investment as well as reduce the need to levy inflationary taxes, i.e., in the indirect tax mode whose incidence on the poor is greater than on the rich and accounts for 40 percent poverty levels in this country.