Capital proposal: East or West?

Fact 1: As of July 12, the net liquid foreign exchange reserves of the State Bank of Pakistan (SBP) stood at $9.4 billion. Fact 2: Over the next five years, our gross financing requirement is $123 billion. Fact 3: This substantial disparity underscores a significant external financing challenge.

Pakistan’s external debt mainly consists of four components: multilateral, bilateral, bonds and commercial bank debt. About 40 percent or $55 billion of the total external debt is owed to multilateral institutions such as the Asian Development Bank (ADB), the World Bank and the Islamic Development Bank (IDB), as well as the International Monetary Fund (IMF) with a debt of $7.6 billion. Given the nature of these institutions and Pakistan’s continued involvement with them, a significant portion of this debt is likely to be rolled over, contingent on continued policy compliance (read: keeping the West happy).

The remaining 40 percent of external debt is bilateral, owed mainly to China, Saudi Arabia, the UAE and Qatar. As with multilateral debt, it is crucial to align our foreign policy with the interests of these creditor countries to secure debt renewals.

In addition, Pakistan has outstanding international bonds and Eurobonds totaling $8 billion, coupled with $8 billion of commercial bank debt. These debt instruments introduce an element of market risk, as repayment and refinancing depend on investor confidence and prevailing market conditions.

In summary, Pakistan faces a persistent external financing gap, with projected financing needs consistently exceeding dollar inflows in the near term. While about 90 percent of external payments are expected to be managed through rollovers, a financing gap of at least $15 billion needs to be addressed to maintain external debt sustainability.

China’s $1 trillion Belt and Road Initiative (BRI), of which the China-Pakistan Economic Corridor (CPEC) is one of six economic corridors, is facing mounting financing challenges. With an estimated $750 billion of BRI investment in serious trouble, the initiative’s momentum has waned. Pakistan, facing a significant external financing gap, needs both debt refinancing and new capital injections. While Beijing may be tempted to extend debt maturities, reliance on substantial new financing from China to bridge the “gap” seems optimistic given the broader economic pressures facing China.

To be sure, navigating Pakistan’s intricate geopolitical chessboard requires a trifecta of strategic insight, tactical foresight, and diplomatic dexterity. Yes, the lure of the East, symbolized by the BRI, is enchanting. However, the stark reality of the BRI’s financial distress casts a long shadow. The West, with its deep pockets, is using its considerable financial resources to project power through its financial systems.

Pakistan’s quest for economic stability is navigating deep and treacherous waters. Securing our financial lifelines is imperative. A fundamental question arises: Can Pakistan sustain its trajectory without strategically realigning its economic and geopolitical priorities?

The writer is a columnist based in Islamabad. He tweets/posts saleemfarrukh and can be reached at: farrukh15hotmail.com