Pak­istan’s new leader faces fail­ing econ­omy

The Atlanta Journal-Constitution - - FROM PAGE ONE - Jef­frey Get­tle­man

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?”

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