The challenges Pakistan's new finance minister faces
Pakistan's founding father, Mohammed Ali Jinnah, reportedly was disappointed with the British partition of India in 1947 because it divided Punjab and Bengal. Jinnah complained that he was given to rule a “truncated and moth-eaten Pakistan.” It is not known whether Pakistan's new prime minister, the cricketer-turned-politician Imran Khan, had something as colourful to say about the country he will rule before he was sworn in, but he must be aware that the country he will preside over is a divided nation torn by political strife for at least the last 10 years if not more. And, now the bad news we get from all sources is that its economy is in trouble, and might need to be bailed out by the IMF pretty soon.
The new Finance Minister Asad Umar had indicated a few days ago that the country will decide in September whether it will go for a new IMF loan to shore up its external account balance. However, Pakistan faces more than simply balance of payments hardship. Fortunately, Mr Umar has had experience as a business manager prior to joining politics in 2012 and has promised that the economy will be run on fundamentals rather than political gains.
Only on July 27, The Wall Street Journal warned, “Imran Khan is a newcomer to power in Pakistan, but his first challenge is a familiar one for the country: a crushing financial crunch that will likely require an international bailout and spending cutbacks.” Before he stepped down, Pakistan's de facto finance minister, Miftah Ismail, announced that this fiscal year Gross Domestic Product (GDP) will grow by 5.8 percent this year, which might be the highest in 13 years but is still less than that of its two other South Asian neighbours, India and Bangladesh. Pakistan is now the world's fifth most-populous country, and at 220 million just surpassed Brazil, and is only behind China, India, US, and Indonesia. To add to this demographic issue, Pakistan is one of the youngest countries in the world, and needs to create almost 1.3 million jobs annually for its youth population alone.
The prime minister will need to use all his charm and fame to tackle electricity shortage, a failing tourism industry, falling stock markets, and the foreign exchange crisis. Pakistan's foreign reserves have also been dwindling amid a consumer boom and a spike in imports, including machinery for Chinese projects that form part of the Belt and Road initiative. Analysts have raised the concern that Pakistan's partnership with China has left the country critically in debt, and it might be soon handing over its ports and other infrastructure to China, replicating a scenario similar to Sri Lanka's. Last year, after it was unable to repay more than USD 1 billion of Chinese debt, Colombo granted a Chinese state-run company a 99-year lease on Hambantota port, which Beijing financed. China's “One Belt, One Road” (OBOR) initiative started as an effort to develop infrastructure of its neighbours including Pakistan, but the easy loans have reportedly led to delays and burdened Pakistan with lots of headaches.
Imran Khan has promised during his election rallies that fixing Pakistan's economy will be his top priority. Pakistan's economy now appears to be heading for a fall, undercut by falling currency reserves and repeated devaluations of the rupee. Economists suggest another IMF bailout (13th since 1980) is unavoidable unless China comes up with new loans—an option with its own set of drawbacks, given worries about Beijing's overbearing presence and strategic ambitions.
Even before the elections, Pakistan was facing many challenges in its external balance as well as debt service accounts. Any marginal export growth was heavily offset by soaring imports, which swelled the trade deficit to almost USD 33.9 billion during the July-May period of fiscal year 2017-18. It was obvious by the time elections came around, that Pakistan will need another round of IMF assistance to extricate itself from the dire straits it finds itself in.
Unfortunately, Pakistan cannot be sure that its negotiations with the IMF for loans will go as smoothly as in the past. USA's relationship with Pakistan soured after President Trump cancelled approximately USD 255 million in aid and accused Pakistan of “deceit and lies” when working with the US. This feud has led several US senators to request the IMF to review whether countries that are tied to China's infrastructure plans, and borrow from China, are relying on IMF for assistance to overcome their debt-servicing problems.
Georgia Republican David Perdue, along with 15 other senators, raised the issue in a letter earlier this month to Secretary of State Mike Pompeo and Treasury Secretary Steve Mnuchin. The letter details how China uses “debt-trap diplomacy to nurture dependence and extract strategic concessions from its borrowers.” There is growing concern that China might secure special privileges to Pakistan's Gwadar port in Baluchistan in a quid pro quo deal for the loans.
Incidentally, IMF had previously warned that Beijing-financed projects under the “Belt and Road Initiative” are partly to blame for economic problems in countries in Asia and Europe including Pakistan, Djibouti, the Maldives, Laos, Mongolia, Montenegro, Tajikistan and Kyrgyzstan. In a precautionary move, American senators have asked the aforementioned secretaries, Pompeo and Mnuchin, to work with IMF to offer alternatives to Chinese credit when developing countries are in need of infrastructure financing.
Dr Abdullah Shibli is an economist, and Senior Research Fellow, International Sustainable Development Institute (ISDI), a think-tank in Boston, USA. His new book Economic Crosscurrents will be published later this year.