Pakistan’s Khan slams IMF, then seeks bailout. Why the change?

Prime Minister Imran Khan’s ambition of creating a “New Pakistan” has suffered a series of economic setbacks, forcing his administration to apply to the International Monetary Fund (IMF) for an emergency bailout of more than US$8 billion, the largest in the country’s history of indebtedness.

When talks begin in the coming weeks, the country will have to make political compromises, as with its past dealings with the IMF, according to analysts.

IMF managing director Christine Lagarde last week said the organisation would require “absolute transparency” on Pakistan’s debts, including its obligations to the China Pakistan Economic Corridor (CPEC), a series of infrastructure projects currently under construction.

Dr Adeel Malik, a development macroeconomist at Oxford University, said Pakistan was aware “an IMF programme would be readily available as long as they have given a geopolitical concession behind the scenes”.

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“Then the IMF can step in and do all the necessary accounting exercises and push for the traditional buttons – exchange-rate devaluation, expenditure cutting and the like. The IMF programmes do not solve the political incentive problem, but just exacerbate it,” Malik said.

Pakistan is also under intense US pressure to force its Taliban allies to cease fighting in Afghanistan and talk to the Kabul administration, to facilitate the military exit sought by US President Donald Trump.

Pakistan has also been watchlisted by the Financial Action Task Force, a multilateral anti-money laundering body, for failing to shut down anti-India militant groups whose leaders continue to hobnob with cabinet ministers.

“If we assume the IMF, motivated by intensifying US pressure, will be tightening the whip this time round, then Pakistan will have a major problem on its hands,” said Michael Kugelman, deputy director of the Asia programme at The Wilson Centre, a Washington-based think tank.

“And that’s because Islamabad may be willing to take some tough steps, but it’s not going to betray entrenched, long-standing interests that require it to alter its relations with anti-Afghanistan and anti-India militant actors.”

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Pakistan’s desperate situation has come to a head barely two months into Khan’s tenure. He campaigned for office by promising a ruthless anti-corruption campaign to create confidence in Pakistanis to start paying their taxes – barely 10 per cent do. He promised to work rapidly to recover the proceeds of Pakistani corruption, estimated to be worth tens of billions of dollars, invested in offshore assets. He claimed he would be able to mobilise investments from the 10-million-strong Pakistani diaspora in the Persian Gulf, Europe and North America.

Alongside these, Khan was confident his administration would be able to avert a looming balance of payments crisis with short-term support from Pakistan’s “brothers”, China and Saudi Arabia. An application for an IMF rescue package, considered inevitable by economists, was shunned by Khan, who has expressed such distaste for “begging” from multinational institutions that he described it as worse than committing suicide.

But the foreign reserves of Pakistan’s central bank have dropped to US$8.3 billion, the equivalent of less than 1.6 months’ worth of imports – two weeks short of the amount required to remain eligible for World Bank development aid, according to a tweet from state minister for finance Hammad Azhar.

Exports and remittances are growing at healthy rates but not quickly enough to reduce record trade and current-account deficits fuelled by consumption, machinery imports for the CPEC and the rising price of crude oil.

Azhar said Pakistan needed to generate US$28 billion to meet external financing commitments for the financial year 2018-19, which ends next June. They include US$8 billion of sovereign bond and state Chinese loan repayments. This means the Khan administration must obtain US$8 billion-US$12 billion to avoid a default.

However, in recent talks with Saudi crown prince Mohammed bin Salman and UAE crown prince Mohammed bin Zayed al-Nahyan, Khan discovered stopgap Chinese and Gulf Arab financing, while available, would come with just as many political strings attached as a medium-term IMF package.

Reportedly, they wanted Pakistan to abandon its neutrality in Middle East politics, thereby antagonising Iran, its western neighbour. This realisation forced Khan to knock on the IMF’s door as a last resort, analysts said.

Recent economic reports from Pakistan’s central bank, the Asian Development Bank and World Bank have all pointed to a rapidly decelerating economy. They have shaved 1 per cent off their gross domestic product growth projections for Pakistan between 2018 and 2020. From around 6 per cent, growth is now forecast to slow to 4.8 per cent as Khan enacts unpopular austerity and administrative import-reduction measures.

The rating agency Moody’s said Pakistan could not muddle its way out of crisis by borrowing from international financial markets because, along with Armenia and Sri Lanka, it now tops the list of small economies most vulnerable to refinancing risks.

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Pakistan’s current account deficit grew more quickly than any other emerging economy in the year up to June, to 5.8 per cent of GDP from 4.1 per cent.

Its currency is the cheapest in South Asia, following a 7 per cent devaluation last week, hours after the finance minister announced Pakistan would ask for the IMF’s help.

Overall, the rupee has declined 21 per cent against the US dollar this year. This makes it particularly vulnerable to external shocks like a feared surge in oil prices to US$100 a barrel, the World Bank said. In a report entitled “At a Crossroad”, it warned Pakistan would continue to be reliant on perpetual multilateral aid unless it enacted long-avoided structural reforms to its economy.

To restrain a fiscal deficit of 6.5 per cent to GDP, 2 per cent higher than the government’s target for 2017-18, the Khan administration in September slashed development expenditure for the ongoing financial year.

The axe fell on several major CPEC projects and the price of natural gas for most Pakistani consumers rose by 10 per cent to 20 per cent, a month before the onset of winter. Electricity tariffs are also expected to increase. Defence expenditure – which, along with debt servicing, accounts for three-quarters of current spending – was left untouched.

The business elite has been subjected to no new corporate taxation in the Khan administration’s mini-budget. Their manufacturing concerns, which export mostly to the West and Persian Gulf, have also been exempt from the gas price rise. As a further incentive to boost exports, alongside the rupee’s devaluation, they will also be spared the forthcoming increase in power tariffs, the government has said.

Khan’s administration, like its predecessors, would be reluctant to antagonise Pakistan’s elite classes despite his populist rhetoric against his dynastic political rivals, analysts said.

“Economic crises can be great ways to build a new political equilibrium,” Malik said. “Pakistan’s civil and military elites have long eschewed developing genuine fiscal capacity that would mean building a wider base for direct taxation.

“Unfortunately, this would mean the elite having to tax itself – a prospect they want to avoid at all costs. Hence, rather than carrying out systematic structural reforms at home, they buy time by seeking external support every few years.” ■