Imran Khan swallows pride to clinch toughest IMF bailout yet
Last Modified: 07:00 PM, Wed May 15, 2019

Stephanie Findlay in New Delhi and Farhan Bokhari in Islamabad

FT.com. 15 May 2019
Pakistan’s weak growth and dwindling foreign exchange reserves mean it has few other choices

Pakistan Prime Minister Imran Khan is set to institute the toughest IMF programme in the country’s history as he works to contain a balance of payments crisis that has fuelled scepticism about his capacity to rescue the economy.

The former cricketer, who had in the past declared he would rather die than go with a begging bowl to the IMF, resisted going to the fund for months. Instead, his government secured $9.2bn in bilateral loans from Saudi Arabia, United Arab Emirates and China.

But Mr Khan was forced to swallow his pride in the face of weak growth, inflation around 9 per cent and dwindling foreign exchange reserves — Pakistan has just $8.9bn, only enough to cover roughly two months. Over the weekend, his government announced it had reached a draft agreement with the IMF for a $6bn bailout, Pakistan’s 12th programme since 1980.

“With momentous external debt and current account deficit, we are into the toughest conditions no other government has faced in the history of Pakistan,” said Iftikhar Durrani, a government spokesman. “A sincere and honest prime minister is the key difference, he runs the government beyond personal interests. The country is willing to take correctional measures once and for all, they were waiting for the right kind of leadership and now they have it.”

The three-year agreement aims to support an “ambitious” structural reform agenda designed to “rekindle” economic growth in the largely Muslim country of 200m people, said Ernesto Ramirez Rigo, IMF Pakistan mission head, in a statement released on Sunday.

While the bailout needs the green light from IMF’s board in Washington, analysts expect that Pakistan will have to remove some of the tax breaks extended to businesses and individuals, end costly energy subsidies and devalue the rupee, which has already fallen 22 per cent against the dollar in the past year.

Moody’s estimates that Pakistan is heading for a fiscal deficit of 5.9 per cent of gross domestic product for 2019 and a current account deficit of 4 per cent in the same period. “This is the toughest IMF programme Pakistan has ever had to implement,” said Moeed Yusuf, Pakistan expert at the United States Institute of Peace. “The next two years are going to be very difficult.”

Christian Fang, analyst at Moody’s Investors Service, said the IMF programme was “a step in the right direction” that could help unlock other financing from the World Bank, Asian Development Bank and private capital markets. “For us it’s quite important that the government gets a stable source of external financing, and one that’s not at an expensive cost,” Mr Fang said.

For decades, Pakistan has gone through boom-and-bust cycles as it has struggled to collect taxes, tackle mushrooming public debt and rein in Islamist extremists. Tax revenue amounts to around 11 per cent of GDP, one of the lowest rates in the world. Pakistan ranks 136 worldwide in the World Bank’s Ease of Doing Business Index, far below rival neighbour India at 77.

Higher oil prices in 2017 and strong consumer demand drove up imports, leading to a ballooning current account deficit. Billions of dollars in investment from China as part of the Belt and Road Initiative have failed to translate into an economic boom and heaped on debt, while aid money from Washington was cut under President Donald Trump’s administration over frustration that Pakistan continues to harbour terrorists on its soil.

Mr Khan inherited an economy on the verge of collapse when he came to power in August 2018. But his vacillation over going to the fund has opened the door to criticism that, after years in opposition, his party lacks experience to govern. “These guys promised a lot, but of course they weren’t able to deliver,” said Saad Bin Ahmed, equity head at Arif Habib Limited, a brokerage firm.

The IMF deal comes on the heels of sweeping changes to the country’s economic leadership. In April, Mr Khan fired finance minister Asad Umar, a longtime ally, effectively replacing him with Abdul Hafeez Shaikh, a former World Bank official who comes from outside the party. Two weeks later in May, the governor of the central bank and chairman of the tax collection body were also replaced. The central bank chief previously served as an economist with the IMF. Both men are viewed as technocrats who are expected to try to implement the IMF reforms.

However, Mr Khan’s moves have not impressed all observers. “His best hope was Asad Umar and he’s ended up firing him,” said Asfandyar Mir, South Asia analyst at Stanford University. “Pakistan is a very difficult country to rule and he [Mr Khan] is not prepared for it at all.”

The economic crisis has amplified a rift between the prime minister and Pakistan’s powerful military, whose support helped propel him to power last year, said Mr Mir. “This is going to add friction to his relationship with the military.” The armed forces are more than half a million strong and consume a large portion of the budget, and would be resistant if funding was cut.

Experts say that harsh IMF reforms will result in a further depreciation of the rupee by as much as 20 per cent and cause inflation to hit double digits. That could dent Mr Khan’s popularity after his promises to establish an Islamic welfare state and create millions of jobs. The opposition has promised to protest the “IMF imposed agreement” in parliament.

Yet the bigger danger is that, like in the past, the programme will not be taken seriously. “Can Pakistan turn the corner or will it make the same mistakes?” said Mr Yusuf. “This is very much déjà vu.”

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Publication: FT.com
Organization: Stanford University, United States Institute of Peace, International Monetary Fund, Moody's Corp, Moody's Corp.
Location: Washington, United Arab Emirates, Pakistan, Saudi Arabia, India, Asia-Pacific, Asia, China, Pakistan
People: Farhan Bokhari, Stephanie Findlay
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