New Pakistan Prime Minister Imran Khan is up against herculean challenges as he grapples with the economic mess left by his predecessors. Hard realities tell him that he desperately needs a hefty bailout from the International Monetary Fund (IMF) which does not come easy.
As is its wont, China has been busy moving to neo-colonialise Pakistan by seeking to drown it under heavy debts while Islamabad gets sucked into the Chinese vortex in the context of the construction of the China-Pakistan Economic Corridor (CPEC). The terms of the loans that have been extended to Pakistan are stiff indeed and there are massive strings attached.
If Islamabad thought that it could use a part of the IMF bailout to repay Chinese loans it was living in a make-believe world. IMF managing director Christine Lagarde has already said she would require “absolute transparency” of Pakistan’s debts, including those owed to close ally China. That has put Imran’s government in a quandary.
Imran had promised the people liberal welfare measures like the creation of 10 million jobs and housing for all but with the IMF watching out with a hawk eye, there is no way he can fulfil those promises. The dream of a welfare state would have to be forgotten to put the economy on rails which is no mean task in a country that is in utter doldrums.
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Too many people were making too much-unaccounted money while the state looked on impotently but now if the IMF agenda is to be followed, stiff controls would need to be implemented and vested interests would stand in the way. Saudi Arabia, which is Pakistan’s other economic partner, has already indicated that Islamabad must fall back on IMF and China is only interested in driving Pakistan up the wall and extracting its pound of flesh.
Imran was elected in July with the support of many poorer Pakistanis desperate for a change in a nation where the illiteracy rate hovers above 40 per cent, healthcare is shoddy, and joblessness or underemployment rife among the country’s 208 million people. He will have people clamouring for quick results sooner than later.
The IMF predicted this week Pakistan’s growth will slow to 4 per cent in 2019 and fall to about 3 per cent in the medium term. A sharp increase in oil prices - Pakistan imports about 80 per cent of oil needs - has contributed to a current account deficit that widened 43 per cent to $18 billion in the fiscal year that ended June 30. The weakening Pakistan rupee also contributes to a rise in local energy prices.
Such a scenario does not presage an eight per cent growth that the IMF ideally wants to move towards its goals for Pakistan. In fact, such high growth rate would be a virtual impossibility in the current context. On top of that, the IMF is looking to structural reforms to put the economy on rails which would be tough to push through locally.
With the IMF declaring the Pakistan rupee as overvalued, Pakistan’s central bank carried out its fifth devaluation on Tuesday. Cumulatively, the devaluations have eroded the value of the rupee by 26 per cent in 10 months. The indications are that more devaluations are on the anvil. Bank interest rates have been hiked by 275 basis points since January, to 8.5 per cent. The devaluations have inevitably stoked inflation.
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While Pakistan is seeking an IMF bailout of $12 billion, its requirement would be over $20 billion for the remainder of which it may have to turn to China and Saudi Arabia with the concomitant consequences.
Ahead of Pakistan’s July elections, Imran had promised to open up the books on Chinese investments and even cut projects that were unnecessary or too costly. Whether he would be able to do so and whether the army would allow him to is a moot question as Islamabad stands at the crossroads.