Pakistan’s new leader faces failing economy

ISLAMABAD — The economic mess awaiting Pakistan’s new leader could take the thrill out of his election victory.

The country’s current account deficit, a broad measure of the imbalance between imports and exports, has soared to an alarming $18 billion. Foreign currency reserves would cover less than two months of imports.

The Pakistani rupee is shaky, tax collection is scandalously low (last year, in a country of 200 million, fewer than 1 million people paid any taxes) and Pakistan was recently returned to an international “gray list” for failing to curb terrorism financing, making foreign transactions more complicated and expensive.

So what’s a new prime minister to do?

Imran Khan, the former cricket player whose political party won Pakistan’s disputed election late last month, vowed to tackle the distressed economy the moment he ascends to the premiership, which is expected to happen in the coming days.

But the task will be made more difficult because Pakistan has sandwiched itself between two financial powers: China, from which it has borrowed heavily, and the Western-dominated International Monetary Fund, which might be its short-term savior.

Pakistan has taken out billions in Chinese loans and run up a huge import tab bringing in bulldozers, train carriages and building materials as part of a Chinese-funded master plan to revamp its ports, roads and railways.

That $62 billion plan, known as the China-Pakistan Economic Corridor, has been celebrated by both countries as a long-term investment that will increase trade. It is a cornerstone of a global infrastructure initiative that China calls Belt and Road.

But in the meantime, the Chinese plan is pushing Pakistan’s deficits to unsustainable levels. The country’s debt is rising rapidly and it is running out of hard currency to pay its bills. Pakistani economists say that Khan’s team will have no choice but to beg the IMF for a multibillion-dollar bailout, one of more than a dozen that Pakistan has received since the late 1980s.

That prospect doesn’t make the United States very happy.

“Make no mistake,” Secretary of State Mike Pompeo said. “We will be watching what the IMF does.”

Pompeo objected to the idea of money from the IMF being used by Pakistan to pay back Chinese loans.

“There’s no rationale for IMF tax dollars — and associated with that American dollars that are part of the IMF funding — for those to go to bail out Chinese bondholders or China itself,” he said.

Pakistan’s economy, it seems, has become yet another battlefield between the United States and China.

As the largest contributor to the IMF, the United States has considerable sway over its decisions. And though the United States and Pakistan enjoyed close ties during the Cold War, the relationship has soured. President Donald Trump froze aid to Pakistan at the beginning of the year, citing frustration with its tolerance of extremist groups that operate within its borders.

Economists say that if the United States tried to block a potential bailout, Khan’s government could face a major crisis. It is unclear what the United States’ position is, and the IMF would probably restrict Pakistan from redirecting bailout money to China. Several analysts said Pompeo’s remarks were more an expression of frustration than a definitive statement.

Despite its troubles, last year the Pakistani economy grew at more than 5 percent, faster than most Western economies.

But things could change quickly if Khan’s government doesn’t get a rescue package soon, experts said. Among the concerns are soaring inflation, bank runs, capital flight and new import controls that would make it more difficult to buy items like computers and spare auto parts.

“The situation is certainly not good,” said Mohammed Sohail, chief executive of Topline Management, a brokerage firm based in Karachi, the country’s economic capital. “We could see growth tumbling, interest rates increasing, inflation.”

In return for lending Pakistan upward of $10 billion, the IMF would most likely require more fiscal discipline. That could mean Pakistan would have to cut public spending and increase the amount of taxes it collects. Both are not exactly the moves a populist prime minister would like to make during his first days in office.

Pakistani economists say Khan faces a tightrope in trying to reconcile the IMF’s demands with the goals of China’s infrastructure plans.

“These are our two masters,” said Turab Hussain, an economics professor at the Lahore University of Management Sciences. “How do you serve both?”