Anilesh S. Mahajan | New Delhi, Edition:August 26, 2018
Pakistan's economy is in doldrums" bureaucrats making a beeline for Prime Minister designate Imran Khan's palatial Islamabad home are initiating conversations with this sentence.
They can hardly be blamed. How else would they describe the economy of a nation that is at the International Monetary Fund's doorstep for a bailout to avert an ongoing currency crisis? This is the 14th time in the last 40 years that our neighbour has asked the IMF to rescue it and in the last 60 years it has been to the IMF 21 times. This time round, however, it isn't going to be as easy and Khan knows that only too well.
Khan's party, Pakistan Tehreek-e-Insaf, emerged as the single largest party in the recently concluded general elections there, and these days is piecing together support from smaller parties and independents to stitch his majority. His party won 115 seats in the lower house with 272 directly elected representatives.
It is expected that by 11 August, he will be able to form the government. In the interim, Khan has asked his confidante, Pakistani entrepreneur Asad Umar - the front-runner for the finance minister's job - to get ready to convince the IMF to give Pakistan a $12 billion package - twice as high as the $5.3 billion given in 2013.
India faced a similar situation in the late eighties and early nineties. We did, however, have an advantage - we only needed to move out of a closed economy to an open one, whereas Pakistan needs a complete overhaul.
Khan in his pre-election campaigns promised increased spending on affordable and accessible healthcare, nutrition, school upgradation and expanding the social safety net, where the spending is less than 3 per cent. To achieve this, however, he will have to make sharp cuts in his defence allocations. But given the equations in Pakistan, Khan wont find this easy.
In the last two years, after the IMFs last extended fund facility ended in 2016, Pakistan witnessed political and economical turmoil and when the last fiscal ended, its current account deficit had widened to 43 per cent, with an import bill amounting to $55.8 billion. The stability achieved during these years withered.
The Pakistani Rupee is already under pressure: the State Bank of Pakistan - its central bank - has devalued the currency four times in the last seven months to resolve balance of payment issues resulting in over 20 per cent depreciation.
On 1 August, the Pakistani Rupee was valued at Rs 128 and some change to buy a US dollar bill. Experts say it is still over-valued and likely to depreciate another 10 per cent in the next one month. The major factor in widening the current account deficit is increased imports thanks to the China Pakistan Economic Corridor, (CPEC), slant in remittances and oil price recovery. The low hanging fruit for Khan's establishment could be increasing remittances banking on his popularity among the diaspora.
Foreign exchange reserves are also depleting quickly. The corpus of $16.1 billion in April last year is less than $9 billion today - only good enough to suffice about 43 days of imports-And all of this is only increasing pressure on the currency.
Meanwhile, other macro-numbers like the fiscal and revenue deficits are worrisome. And since direct tax payers are less than 0.6 per cent of population, the collection is dismal too - 4.1 per cent of GDP collected via direct tax. Since it was an election year, Islamabad reduced taxes on commodities such as petrol and diesel. Increased public spending resulted in the fiscal deficit slipping to 6.8 per cent of GDP. Even otherwise, tax collections in Pakistan remained disappointing because of large scale tax evasions. Khan in his poll promise committed to change this.
Meanwhile, the US who is the principal promoter of the IMF opposes any bail-out package for Pakistan. In an interview to an American business news channel, US Secretary of State, Mike Pompeo said, any potential IMF bailout for Pakistans new government should not provide funds to pay off Chinese lenders. Pakistani officials are obviously denying this. That is a clear signal that Islamabad will have to share the details of the hitherto protected $62 billion debt blueprint to build infrastructure, road, railways, power plants, ports, transmission lines and enhance manufacturing capacity.
Mike Pompeo, US Secretary of State, says any potential IMF bailout for Pakistan's new government should not provide funds to pay off Chinese lenders
This may open up another Pandora's Box for the new government as sovereign debt is taken with the commitment of a higher rate of return. The US is not all wrong, the $2.8 trillion foreign debt for $308 billion economy is a trouble. "We will require $10-$12 billion to ignite the investment cycle in the country," a PTI leader said. Pakistan is using this to convince the Chinese to increase debt flow.
A day after the US warning, bureaucrats in Pakistan started clarifying that funds from IMF wont be linked to the CPEC project. Both Pakistan and China are sensitive to any criticism of the CPEC. India is worried that Beijing is systematically enmeshing Pakistan in debt, with a view to grabbing control of critical projects - for instance railways, ports and highways - similar to the way it did with Sri Lanka and Myanmar. Besides, India has reservations on this project, since CPEC will cut across the Gilgit and Baltistan region -which India accuses Pakistan of occupying illegally-to reach the oasis city of Kashgar in Xinjiang province in China.
There are two big challenges for Khan here, debt is expensive, repayment begins almost immediately, and there are hardly any high-end jobs for Pakistanis. In the last fiscal, the first tranche of $5 billion debt reached Pakistan to fund CPEC projects along with addition US$1.5 billion trade facility. This year, the $5 billion disbursement is committed, plus both the talent and the machinery are coming from China.
In all, China's commitment was for debt of $62 billion and repayment will start after 2020 followed by repatriation of profits. Pakistans GDP expanded by 5.8 per cent in the last fiscal, and is expected to grow by another 5.5 per cent this fiscal. This is largely because of foreign debt. Projects are executed by Chinese companies with their own employees and there is resentment about the failure to create sufficient jobs for the local populace in parts of Baluchistan and Punjab where projects have begun. Along with this, expats also add up on the services import list. Khans challenge is complicated further by a series of allegations of corruption. His party leaders are telling the media they want to study the project and allegations of graft against Pakistans political families.
In the last fiscal, Pakistan managed to obtain roughly $10 billion dollars to service the foreign debt. The CPEC repayments will start from 2020, and by 2024 Islamabad will have to pay Beijing $4.5 billion annually. This, in addition to the $22 billion capital goods import required in next three years for completion of these projects. The CPEC deal and the history of dealing with the Chinese bank is clear, and further disbursement of the loan will depend on Pakistan's capacity for repayment.
But as the project started neared commencement, the Chinese establishment realised that it is corruption that is the biggest threat to the CPEC, and not the objections by the US and India. In December 2017, China stopped funding for three road sector projects. Pakistan's ranking in Transparency International's latest index of corruption is 117 while India is at 76. If Imran Khan can reign it in or not, only time will tell. "He won on an anti-corruption plank. We expect him to execute the project with much more vigour," says Sushant Sareen, strategic analyst and fellow at ORF.
What worries India is the possibility that the Chinese use their leverage to become more dominant in their negotiations. In December 2017, the State Bank of Pakistan, said, public and private sector enterprises (both of Pakistan and China) were free to choose the Yuan for bilateral trade and investment activities, largely to reduce dependency on the US dollar. "The Chinese establishment was pushing the regime in Pakistan to allow Yuan as legal tender at least in the region around Gwadar in Baluchistan," says Faheem Jehan Zeb, security analyst based in Lahore. "This was a trade-off." He added that this didn't work much, "most Pakistani businesses have interests in Gulf or in the western world..Trading in Yuan is a distant dream".
Ashok K.Behuria, a Fellow and Coordinator of the South Asia Centre at IDSA, said, in his post-election address, Khan spoke positively on China. "There is consensus among the political elite, on CPEC and its utility for Pakistan. There is a difference in the costs the country might have to pay for this." Meanwhile, former Indian foreign secretary, Kanwal Sibal says, he might ask for more projects for Khyber Pakhtunkhwa region, instead of the current plan, where Punjab dominates. As luck would have it; the Chinese have a track record of hard negotiations especially when they know you are in bad shape.
On July 31, Khan's confidante Fawad Choudhary stirred things up when he said, they were mulling the option of inviting Prime Minister Narendra Modi and heads of other SAARC countries - exactly what Modi did in 2014 - to mark the beginning of a new era in their country. New Delhi is cautious of developments in the neighbourhood, both from the strategic and the economic perspective. A senior official in the security establishment told Business Today, that the situation is being monitored and India is open to any movement towards peace in the general region.
Prime Minister Narendra Modi, however, was advised to avoid going to Pakistan. Choudhary subsequently clarified that his party had decided against inviting any foreign head of state. India has expectedly, adopted a wait-and-watch policy and will wait for Khan to make the first move.
In his post-election speech, Imran Khan took a cautious stand on resolving the Kashmir issue. And New Delhi wasn't waiting with bated breath for a drastic change in Pakistan's stance on Kashmir, in any case. In the last six years, the biggest casualty in the Indo-Pak relationship remained the squeezing of trade and business opportunities. Industries on both sides of the border hope Khan means business. The trade between the two countries is less than $5 billion, but think-tanks on both sides believe this can increase six times -with liberalisation of visas, removal of non-tariff barriers and direct linkages of banks. But this has been the story of relationship between the two countries, ever since they were born in 1947.
Pushing for the roadmap agreed upon in 2012, India wants most favored nation status; Pakistan of course, continued to delay it. And later the accelerated attacks-at Uri army base and Pathankot airbase-and aggravation of the Kashmir situation played spoilsport.
Kanwal Sibal Former foreign secretary, GOI
Will Khan be able to delink Kashmir with trade? Only time will tell. Indian security experts are sceptical. Former Additional Secretary at the Cabinet Secretariat, Rana Banerji, says that Khan might have good intentions, but India will have to react based on execution. He added, in these elections, Khan's party openly courted the cadres of the Harkat ul Mujhahideen -designated a terrorist organisation by the United Nations - along with the history of allocation of public money (from budget of his party run government in Khyber Pakhtunkhwa province) to religious seminary Darul Uloom Haqqania -run by a cleric know as 'The Father of the Taliban'. There are also allegations that a large section of the Pakistan Army's dispensation, 'helped him'. And may seek their pound of flesh when the time comes, he added.
In January this year, Pakistan got a major shock, when US president Donald Trump suspended a substantial part of the $1.3 billion military aid. He questioned Pakistan's covert support to the Taliban and now the PTI has openly used Taliban support to win polls. Meanwhile, senior officials in Indian foreign ministry told BT, they are aware of Khan's soft corner for radicals and add "but we will, have to do business with him."
Sibal also told BT that India should wait and watch developments in Pakistan. "We should give him some time. And not fall into the gimmickry of attending the oath ceremony there," he said. Along with this, the establishment here is also monitoring economic developments there. New Delhi is worried that if the IMF gives in, to the intense pressure from the Donald Trump regime, it may create a scenario, where Khan will tilt more towards China. The Indian establishment is keeping its fingers crossed, hopeful that the IMF will engage with Islamabad. And, even more hopefully Khan will grab hold of what could be his last chance to improve the situation.