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No alternatives left for Imran

On paper, Pakistan’s economy is doing great. Consumer consumption has picked up in the country and raised growth to 5.8% this year, the highest rate on record since 2006. However, macroeconomic imbalances are tarnishing Pakistan’s economic profile and have pushed the newly-elected government of Imran Khan to search for ways to save the country’s finances. In this analysis, Castlereagh Associates looks at the economic predicaments facing Pakistan, the steps taken by Prime Minister Khan to get financial help on the international stage, and the impact such help might have on the country’s political and economic standing.

Pakistan’s Economic Predicaments:

With public debt reaching 70% of the GDP and foreign currency reserves dropping to a paltry $8 billion, Pakistan is facing both a fiscal and balance of payment crisis, as its imports have significantly increased to reach $60 billion per year, compared to a little above $20 billion for exports. In its newest Pakistan Development Update, the World Bank suggested fiscal consolidation involving less spending and better taxation, increased exchange-rate flexibility meaning Rupee devaluations, and more investments in human capital. Pressed by the balance of payment crisis, Khan already addressed the second set of suggested reforms by continuing Rupee devaluations and setting incentives for Pakistani emigrants to send remittances through official banking channels. These measures are likely to raise remittances to a record-breaking level of $22 billion for the 2018-2019 financial year, all this in spite of the departure of many Pakistani workers from GCC states, who some are implementing localisation of workforce policies. Hoping to bring this amount to $40 billion in a few years, remittances could well help alleviate Pakistan’s dearth of foreign currency.

Looking for help internationally:

Yet, Pakistan needs to find immediate solutions to its financial crisis. With current reserves, the country can barely cover two months of imports. This is why Imran Khan has extensively travelled between end of October and early November, from the Middle East to East Asia, in order to find external sources of finance that would decrease his country’s dependence on an IMF loan. Nonetheless, out of the three countries visited in a span of two weeks, only Saudi Arabia responded to Pakistan’s plea for help by providing the country with a $3 billion loan for foreign currency support and another $3 billion in deferred oil payments. Khan’s travels to China and Malaysia did not bring the same returns, although it is likely that China would provide lowkey financial assistance in the form of deferred loan payments, owed by Pakistan to Chinese state- owned companies.

All in all, Prime Minister Khan’s previously reassuring statements highlighting the willingness of “friendly countries” to assist Pakistan have not been substantiated. A Pakistani delegation also travelled to the United Arab Emirates for further assistance, which a Federal Minister estimated to $6 billion, an exceedingly high number in our view. Indeed. the Gulf state is more likely to provide less significant help in the form of deferred oil payments and humanitarian aid. Similarly, Malaysian Prime Minister Mahathir Mohamad, who seemingly shares the same views as Imran Khan concerning China’s Belt and Road Initiative (BRI) projects, did not touch upon the subject of economic assistance. Such omissions contrast with what the Pakistani Finance Minister Asad Umar lately said: according to him, the country’s balance of payment crisis has been averted, probably as a result of the Saudi loan and coming negotiations with the International Monetary Fund. Yet, our analysis holds that officials’ statements often underestimate the severity of the country’s macroeconomic problems and mask the hardships that go with them.

Indeed, the relative failure of Pakistan to find alternative sources of finance is likely to lead the country to get a bailout from multinational development banks, something long-expected by many observers. One of these multinational development banks is the International Monetary Fund, which has sent a delegation to Pakistan in order to discuss the modalities of a loan. Most accounts hold that the loan would be around $12 billion, as specified by the Finance Minister, who also raised the possibility of $5 billion lent by the World Bank and the Asian Development Bank. Moreover, the Jeddah-based Islamic Development Bank also pledged the same amount to Pakistan last August, but it remains to be seen whether such loans will be provided.

What this all means?

Internationally, Khan’s recent travels reflect a cooling of Pakistan’s relationship with China, and a reiteration of Saudi Arabia’s willingness to keep close relations with the South Asian nation. The Pakistani Prime Minister has on multiple times criticised the China-Pakistan Economic Corridor in front of his domestic audience and has pledged to renegotiate the terms and conditions of several contracts worth $60 billion and signed with Chinese state-owned companies by his predecessor Nawaz Sharif. These comments have certainly not been well-received by Beijing, which is likely to refuse solving Pakistan’s economic woes in lieu of its officials. This episode also shows that there is still much to be defined in the China-Pakistan partnership, especially in terms of task delegation and responsibility sharing. When it comes to Saudi Arabia, the $6 billion aid has been provided at a time when it is in the Gulf state’s interest to sustain its non-Western alliances. With its nuclear arsenal and large military, Pakistan has been a key priority for Saudi foreign policy. The financial assistance is therefore a way to ensure that Khan’s early worrying statements about a shuffling of alliances with the Middle East would not materialise.

Domestically, the strict terms and conditions of multinational development banks’ loans are likely to have several effects for Pakistan. A bailout from the IMF would be the thirteenth in the country’s history and is likely to be twice as high as the previous loan provided in 2013. Such dependence on the IMF is likely to disrupt Khan’s populist agenda. His party, Pakistan Tehreek-I-Insaf ran elections on a platform stressing an extensive social programme. Yet, the IMF bailout is likely to force the Prime Minister to adopt some austerity measures, thus bringing growth down to around 4.5% next year. Devaluations are also likely to continue for Pakistan’s Rupee and it remains to be seen how transparency and accountability requirements from the IMF are going to reinforce or undermine Khan’s anti-corruption agenda. Indeed considering that the country was put on the Financial Action Task Force’s (FATF) grey list in June, it is important for the Prime Minister to ensure that his fight against money laundering and terror-financing advance the FATF’s action plan instead of being a mere platform to attack political opponents.

Source:

Khaleej Times, 30 October 2018, “Pakistan Remittances May Hit $22 Billion in 2018-2019.” Voice of America, 27 October 2018, “China to Give Pakistan ‘Grant’ as UAE Mulls $6B in Aid.”

Economic Times, 07 November 2018, “Pakistan Gets a Boost of Confidence but IMF Bailout Still On the Cards.”

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