As Political Discord Hits Pakistan, Economic Challenges Loom

  • Current account quarterly gap widens to over four decade high
  • Improvements not expected until after 2018 vote: strategist

An under construction tower stands in Karachi, Pakistan.

Photographer: Asim Hafeez/Bloomberg

Along with political turmoil, Pakistan faces economic headwinds ahead of a national vote next year with achievements made under a three-year International Monetary Fund loan program starting to fade.

The government is now more focused on handling the fallout from the disqualification of Nawaz Sharif as prime minister in July and U.S. President Donald Trump’s comments last month on Pakistan’s alleged harboring of terrorist groups. Yet looming in the background is a potential economic slump. The current account gap has more than tripled to $4.3 billion in the quarter ended June, the worst level in more than four decades, according to data compiled by Bloomberg. The central bank’s foreign exchange reserves have declined by a quarter since an October peak.

Investors have been spooked by the political and economic deterioration and the nation’s key stock index entered bear market territory last month. The South Asian nation has also faced criticism of its handling of the currency after a devaluation spat between the central bank and finance ministry in July.

Despite calls from the IMF and Moody’s Investors Service for the central bank to abandon its grip on the currency and allow more flexibility, Finance Minister Ishaq Dar blamed the regulator for “miscommunication” over the rupee’s 3.1 percent depreciation on July 5 and immediately appointed a new governor.

“Macroeconomic vulnerabilities have built up again,” said Firat Unlu, an analyst at the Economist Intelligence Unit in London. “These are primarily driven by domestic factors such as fiscal slippage and authorities’ attempt to maintain exchange-rate stability. The politicization of exchange-rate management has contributed to the widening of the trade deficit, weakening the macroeconomic outlook.”

Prime Minister Shahid Khaqan Abbasi, who was appointed as Sharif’s successor, in an  interview last month ruled out any currency devaluation to boost flagging exports and to fix widening deficits. He instead suggested cutting “unnecessary” imports. The nation’s currency has been the most stable in Asia since 2014 against the dollar, according to data compiled by Bloomberg.

Still, Abbasi expects economic growth to be close to government’s 6 percent target for the year ending June. That confidence stems from Chinese investment in the nation. China is financing power plants and infrastructure projects valued at more than $50 billion as part of Chinese President Xi Jinping’s “One Belt One Road” push. It will help end energy outages before elections that have resulted in long cuts at homes and factories.

The removal of Sharif after a court-mandated probe into his family’s finances did hurt business sentiment, but projects will continue as planned and growth targets will be met, according to Abbasi.

“Yes we have challenges, but we are taking measures to meet them,” Pakistan’s finance ministry said in a statement. “Our exports are showing signs of recovery and remittances have improved. While imports have seen strong growth it has been primarily on account of power generation machinery for CPEC power projects. Moreover, non-essential imports are likely to slow down in view of various measures taken.”

Others aren’t so optimistic. Pakistan’s annual current account deficit is forecast widening to 5 percent of the economy in year started July, according to Karachi-based brokerage Topline Securities. The gap is more than double deficits compared with 1.5 percent in India and 1.9 percent in Indonesia, according to IMF estimates.

“In the short term there is obvious political uncertainty and short term weakness in the reform front,” said Jetro Siekkinen, head of portfolio management at Aktia Asset Management Ltd. in Helsinki that oversees $2.1 billion in emerging-market debt. “In the longer term, we see Pakistan as an attractive case due to economic reforms executed during the IMF program and infrastructure projects in the pipeline.”

The government won’t seek another IMF bailout package and is poised to introduce “radical” tax reforms, according to Abbasi. Sharif had taken a loan from the multilateral lender to stave off a balance-of-payments crisis in 2013, and the facility was completed in September.

“The economy is all about cycles, ying and yang. Pakistan is just a bit yang at present,” said Stephen Bailey-Smith, an investment strategist at Kolding, Denmark-based Global Evolution Fonds A/S, which manages $5.5 billion. “We do not see it improving into elections.”

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