Explained: How China and the United Arab Emirates are helping Pakistan overcome its economic crisis

Seeking ways to overcome its current economic crisis, Pakistan may consider giving away minority shares in its state-owned companies in the United Arab Emirates at a negotiated price, according to a Pakistani newspaper. The Express Grandstand.

China, another Pakistan ally, also stepped in to help the country with a $2.3 billion loan.

Pakistan’s Federal Finance and Revenue Minister Miftah Ismail tweeted about the Chinese consortium’s loan to the State Bank of Pakistan on June 24.

As Pakistan’s economic situation has deteriorated in recent years with declining foreign exchange reserves, it has turned to various types of loan arrangements. Sources told the Express Tribune that this time the UAE was unwilling to give $2 billion, after Pakistan failed to repay the loan it received in February 2019 from the same amount.

Who all helped Pakistan deal with the crisis?

The Express Tribune cites sources that the UAE government has offered to acquire 10-12% of shares of state-owned companies in Pakistan through its sovereign wealth funds.

“There is a proposal from a friendly country to buy shares of Pakistani companies on a buyout basis, which means buying securities based on secured loans,” Finance Minister Miftah Ismail said during the meeting. an interview with The Express Grandstand. This means that Pakistan would like to buy back the shares of its companies after a certain period.

Meanwhile, China has also offered loans to Pakistan in the past, such as in March 2019, it extended a $2.1 billion loan to the South Asian country. It was reported that in the same year, the country received $1 billion each from Saudi Arabia and the United Arab Emirates, as part of bailout packages granted by the two Gulf countries. Saudi Arabia’s loans were part of a $6 billion bailout, which was agreed in 2018.

Besides its traditional allies, Pakistan has reached out to countries that have given it loans in the past for temporary aid. On June 27, the country’s Economic Affairs Division tweeted that it had signed a “debt service suspension agreement with the French Republic” to suspend loans worth $107 million. The amount that was previously repayable between July and December 2021 will now be repaid over six years (including a one-year grace period) in semi-annual installments.

Similarly, in April 2021, in light of the Covid-19 crisis, Japan agreed to suspend $370 million in loans to Pakistan, Express Tribune reported.

Has the IMF offered to help?

Currently, Pakistan is asking for a bailout from the IMF but has not received any confirmation to that effect. The Express Tribune reported on June 29 that the IMF had set four “strict preconditions” which include raising electricity tariffs and imposing a petroleum tax of Rs 50/litre. Although not part of the prerequisites, the IMF has also called for the establishment of an anti-corruption body to investigate government corruption.

Once done, the IMF would present Pakistan’s request for approval to its Executive Board. At the end of it, the approval could help the country obtain a loan of 2 billion dollars.

Why is wrong with Pakistan’s economy?

In recent years, due to multiple factors, Pakistan has been experiencing economic problems of worsening inflation and depletion of its foreign exchange reserves. According to the World Bank‘s outlook for the country from April this year, this is due to “long-standing structural weaknesses in the economy and weak productivity growth”.

A “less favorable external environment for exports” further contributed to a record trade deficit, weighing on the Pakistani rupee.

This is not the first time that the country has experienced a financial crisis. However, this time international organizations are not lending to the country on the same terms as before, with the exception of China. Chinese investment in Pakistan is significant, but not limited to the China-Pakistan Economic Corridor – an infrastructure project that is part of China’s ambitious Belt and Road Initiative.

Pakistan has seen a change in direction since many of these agreements were negotiated, and the future prospects for its economy remain uncertain. The World Bank said the outlook looks good in some areas such as rice and sugarcane cultivation, and positive private consumption growth affected during the Covid peak.

The FTAF has also recently recognized Pakistan’s improvements in combating terrorist financing, and it could move off its gray list, potentially inviting more investment and improving the ability to borrow from international organisations.

However, the World Bank has warned that “domestically, political tensions and policy slippages can also lead to protracted macroeconomic imbalances.”

Fuel and electricity shortages, inflation and prolonged heat waves affecting agriculture, such as that seen this year across the subcontinent, are major short-term concerns.

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