NEW YORK: Imran Khan is set to take power in Pakistan when the country faces a crushing financial crunch that will likely require an international bailout and spending cutbacks, The Wall Street Journal, a major American financial newspaper, reported Saturday.
“He will take control of a government whose finances are crumbling. Pakistan has taken on massive debts in recent years to cover budget shortfalls and build critical infrastructures such as power plants and roads, and it faces rapidly rising interest payments,” the newspaper said in a dispatch from Islamabad.
Meanwhile, the country’s foreign exchange reserves have dwindled to critical lows, covering less than two months’ worth of imports, as the central bank has tried to support an overvalued currency against rising fuel imports, falling exports and a flood of imported goods needed for construction projects.
While growth increased to nearly 6% under the last government, its highest level in 13 years, that has also created a fiscal deficit and current account crisis. The reckoning will likely draw all of the new government’s attention in the coming months, the Journal said, citing analysts.
“Mr. Khan’s first major policy task will almost certainly be negotiating a bailout with the International Monetary Fund,” the newspaper said.
“Some sort of bailout is needed. Pakistan has been kept going on short-term Chinese credit,” Asad Umar, a former corporate chief executive who is likely to become the new government’s finance minister, told The Wall Street Journal just days ahead of Wednesday’s election.
Pakistan has developed close relations with China, and it has bridged the economic emergency partly with short-term Chinese commercial loans in recent months, on top of the tens of billions of dollars it has borrowed from China for long-term projects, the dispatch noted, while pointing out that in the past the Arab Gulf states had helped Pakistan.
Some Pakistani officials, the Journal said, have suggested that there could be a Chinese bailout, adding that the most likely source of funding of the size Pakistan needs would be IMF.
“Mr Khan comes in with an ambitious domestic agenda, of fixing public services such as education, and creating 10 million jobs, which all require economic growth and rising spending,” the dispatch said. “But a bailout could force a slowdown in order to reduce imports, and deep cuts in government spending.
Miftah Ismail, the last finance minister in the outgoing government of Mr. Sharif’s party, said the budget faced a “structural” problem: after paying money to the provinces, financing defense and paying off interest on debt, the government was in deficit even before current expenditure. “I had nothing left,” Ismail was quoted as saying.
One painful measure has already been taken for the new government, however: a 20% devaluation of the rupee since December, making exports more competitive.
Imran Khan has promised to double tax revenues over his five-year term, which will be tough in a country where only about 1 million people out of a population of 208 million pay income tax.
A senior Pakistani official told the Journal that the country needed an $8 billion to $10 billion bailout.
“There is no assured financing plan before us,” the official was quoted as saying. “There are very few options other than the IMF.”
Pakistan finished repaying a $6.6 billion IMF loan in 2016.
Pakistan’s current account deficit widened 43 percent to $18 billion in the fiscal year that ended June 30, while the fiscal deficit has ballooned to 6.8 percent of the economy, a report in The New York Times said.
“Pakistan is facing the biggest economic challenge in the country’s history,” Khan said in his victory speech on Thursday, where he outlined a reform agenda.
“Our economy is going down because of our dysfunctional institutions. We need to fix our governance systems.
“If Khan does turn to the IMF, the Washington-based body will likely require spending cuts to reduce the fiscal deficit, which could imperil his populist promises to improve the lives of the poor by building world-class schools and hospitals,” the Times’ report said.
On the campaign trail, Khan has zeroed in on Pakistan’s culture of tax evasion, which is prevalent across South Asia and means only about 1 percent of the population pays income tax.
Increasing that figure would be a major coup for the economy and Khan, who has vowed to reform the Federal Bureau of Revenue (FBR) in his first six months in office, the Times said.
He has also promised to step up an anti-corruption drive, though this risks triggering capital flight in a country where vast wealth is undocumented, analysts say.
Another immediate focus will be on reforming state giants such as Pakistan International Airlines and various power utilities, which the previous government struggled to privatize.
Exotix Capital, a research house, said Pakistan’s long-term outlook hangs on whether Khan can improve governance and end the culture of the powerful avoiding taxes and sucking cash out of state-run enterprises, which adds to the fiscal burden.
“Otherwise, we are simply in for more the same (advice to investors): buy Pakistan as it heads to the IMF and sell before the IMF loan ends,” Exotix said in a research note.