Task cut out to avert currency crisis, implement reforms
Equity and bond markets have welcomed Imran Khan’s victory in Pakistan’s disputed election, but the former cricket hero faces a tough slog to avert a currency crisis and implement long-term reforms needed to end decades of boom-and-bust cycles.
Khan’s first major economic call will be to decide whether to ease pressure on the rupee by seeking Pakistan’s 12th bailout from the International Monetary Fund (IMF) since the late 1980s.
Harder still will be to persuade more people to pay taxes in a nation famous for tax dodging, turn off subsidy taps draining government coffers, and reform loss-making state-run enterprises that past governments have struggled to sell off.
“The country’s position is such that now you can no longer sustain the status quo,” said Suleman Maniya, head of research at local brokerage house Shajar Capital. “Speed is of the essence.” Pakistan’s central bank has devalued the currency four times since December, weakening the rupee by more than 20 per cent, amid efforts to avert a balance of payments crisis in the $305 billion economy. A similar scenario in 2013 led to Pakistan obtaining a $6.7 billion loan from the IMF.
While the economy is growing at 5.8 per cent, the fastest pace in 13 years, pressures on Pakistan’s current account show no signs of abating. The country’s central bank is concerned by rising global oil prices — Pakistan imports about 80 per cent of oil needs — and dwindling foreign reserves, which plunged to just over $9 billion last week from $16.4 billion in May 2017.
Pakistan’s current account deficit widened 43 per cent to $18 billion in the fiscal year that ended June 30, while the fiscal deficit has ballooned to 6.8 per cent of the economy.
“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 Washingtonbased body will likely require spending cuts to reduce the fiscal deficit, which could imperil his populist promises.