Pakistan to Find Out What the Economy Is Like Without Safety Net

  • Sharif given $6.6 billion IMF loan in 2013 to avert crisis
  • Panama Papers uproar, 2018 elections seen as reform headwinds

Pakistan has seen its growth accelerate, stocks soar, currency stabilize and foreign-exchange reserves triple to a record in recent years.

Now, the economy faces the test of going without the safety net of an International Monetary Fund program.

The South Asian country’s success since 2013 has come under a $6.6 billion IMF loan that helped avert a balance-of-payments crisis. It’s done so well that Finance Minister Ishaq Dar has proclaimed the country doesn’t need the IMF anymore, calling time on the help -- and the conditions attached -- as the program ended last month.

With Prime Minister Nawaz Sharif facing elections in 2018, the danger is that the government loosens an already-patchy commitment to boosting tax revenue, and goes slow on plans to sell state assets -- a largely unpopular initiative that’s triggered protests. Also on the to-do list: overcoming the power blackouts that are the legacy of decades of under-investment.

“As we head into elections, the risk is that once the shackles of an IMF program are removed, the fiscal consolidation and macro-stabilization will be reversed,” said Alan Cameron, a London-based economist at Exotix Partners LLP. “The mandate for serious structural reform is no longer there.”

While Sharif’s administration has pledged to continue to boost the country’s feeble tax base and end economically-crippling power blackouts before the 2018 vote, protests and unrest have slowed the privatization of key state companies. In attempting to implement that IMF program, Sharif’s government has sparked protests from unions, opposition leaders, businessmen and ordinary citizens.

Sharif is also facing calls to resign from opposition parties, most vocally from cricket star-turned-politician Imran Khan, after leaked files from a Panama law firm this year showed his children used offshore companies to make investments. He has denied any wrongdoing, while the opposition presented a bill in Senate last month to start an investigation. 

The uproar is emblematic of the persistent challenges to Sharif’s authority throughout his latest term that have undermined efforts to make Pakistan’s economy more market friendly.

Even with limited progress on reforms, Pakistan’s gross domestic product growth accelerated to almost 5 percent, from an average of about 3 percent in the five years through 2013, supported by buoyant construction activity, strengthened private sector credit growth and Chinese-led investment, according to the IMF. The rupee and Pakistan’s stocks have been among Asia’s best performers since 2013, boosted by the IMF program and MSCI Inc.’s June announcement it would include the nation’s equities in its emerging-markets index.

The fiscal deficit at 4.6 percent for the year ending July -- surpassing the IMF program’s target -- is still too big and tax collection is still about the weakest in the region, said Daniel Martin, a senior Asia economist at Capital Economics Ltd. in Singapore. There’s a high chance of a roll-back or at least further stalling of economic reforms ahead of elections in two years, he said.

‘Poor Record’

“Pakistan’s poor track record means there is every reason to be skeptical,” Martin said in an August report. “Flying in the face of public opposition will become even harder once the IMF is out of the picture and can no longer be blamed for unpopular decisions. We suspect the end of the IMF agreement will be the beginning of the end for the reform program as well.”

The nation is now looking at Chinese investment of about $46 billion in projects including new power plants, announced last year by China’s Xi Jinping as part of a so-called China-Pakistan Economic Corridor. Sharif’s Pakistan Muslim League ahead of elections is seeking to end black outs and a national shortfall of 3,000 megawatts, which has stifled growth in South Asia’s second-largest economy.

To read about China’s ambitions in Pakistan, click here.

“The outcome of the program is Pakistan was saved from default and now can live for two more years with this amount of reserves,” said Ashfaque Hasan Khan, a former finance ministry adviser and now dean at the business school at Islamabad’s National University of Sciences and Technology. “They will say we have achieved economic independence, this will be used in the election.”

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