A man who continues to refuse to concede to the opinions of his sternest critics, Imran Khan has triumphed after his 25 year vigil in the corrupt quagmire that is Pakistan politics. It seems yet again the hopes of a nation rest on his shoulders, but this time he is trying his hand at Pakistan’s most corrupt institution, rather than cricket (the second most), the government. His sentiments certainly seem strong with plans to develop world class education and healthcare, even rejecting the official Prime Minister’s residence to reduce needless expenses. As grand as these gestures seem, his plans for development will require money and Khan’s government will inherit an economy on the verge of collapse.
With his inauguration set for the 17thof August, it seems the real challenge is really yet to come. Before he can implement any meaningful changes the first order of business for his government will be to re-establish the rapidly eroding economy he has inherited from his predecessor Nawaz Sharif, currently in prison on corruption charges no less.
However, it seems that Khan is the right man to overcome this hurdle. An early indicator of this was that his election itself has reinforced some confidence in onlookers as a minor recovery in the rupee from 130 to 122 (due to a Beijing loan of $2 Billion) against the US Dollar immediately followed after his election. However, this superficial change will need to be supported by pragmatic and swift economic policy, and Khan has entrusted Asad Umar (formerly CEO of Engro, and Pakistan’s highest paid CEO) to marshal the economy back into shape as his Minister of Finance.
The main issues facing the economy are a balance of payment issue whereby the rupee has devalued by over 20% in the last 7 months. Similarly, in the last year the Pakistan stock exchange had gone from being Asia’s best performing market to the world’s worst. Debt is also running rampant as the government’s current account deficit is $18 billion (7% of the GDP). These issues remain a constant but the immediate issue is that the government is due to pay $12 Billion at the end of the month, as an instalment on foreign loans. It also has a total of $91.8 billion in outstanding foreign loans.
Therefore Khan’s grand vision for Pakistan may have to take the backseat to the nation’s financial woes. He must also make this growth sustainable by addressing the corruption which pervades the entire system, no mean feat in itself. However, the imprisonment of the former Prime Minister’s corrupt family seems a profound step in the right direction. However, how well he juggles all of these issues will determine how successful his tenure is, and with no limit on the number of terms one can hold office, the success of this period could usher in an era of Khan.
Reasons for Crisis
Ex PM Nawaz Sharif
As with any financial crisis there have been a number of identifiable reasons for the current state of Pakistan’s economy. Perhaps the most current and relevant reason is the actions of the former Prime Minister Nawaz Sharif (who remarkably has never completed a single one of his three terms) and the other politically influential family in Pakistan, the Bhutto-Zardari family. Particularly in Sharif’s last tenure his corruption took a significant toll on the nation. The $91.8 billion external debt and liabilities were higher by $30.9 billion or 50.6% compared to the level recorded in June 2013 when the Pakistan Muslim League-Nawaz (PML-N) government came to power.
His general methods of siphoning off wealth were ‘kick-backs’ from large construction contracts and taking loans against national collateral which he amassed as private wealth. This wealth has been transferred into off shore accounts and prime real estate such as the Evanfield flats in London, alongside 350 more properties jus in London. His family’s wealth is estimated to be in the $100s of billions, more than the entire national debt of Pakistan. Zardari emulated this level of corruption when he was President during the previous decade. Sharif’s actions have caught up to him after the recent Panama leaks and the return of the black money is being agreed upon by the appropriate nations. This is a positive outcome for the nation, as the return of this stolen money is more than enough to pay their debts and fund Khan’s aspirations. However, this process may take some time and Khan must seek more immediate remedies for his predicament.
Unfortunately, some lasting damage has been done to Pakistan’s infrastructure in particular; examples such as the decline of the Pakistani International Airlines in the last decade have been well documented. Moreover, this corruption culture pervades the system having infiltrated every level of the Bureaucracy. However, Khan is setting an example himself and is enforcing it upon all high ranking officials, making significant changes to the legitimacy of expenses; long gone are the days of officials travelling in Mercedes through areas where running water is considered a luxury. Khan hopes his restructuring will trickle down and restore the masses faith in the government.
However, the open secret of corruption has disillusioned the masses and subsequently the amount of tax which is collected by the government is miniscule. As per a Bloomberg report, only 1 percent file income tax returns, of Pakistan’s 210 million people, from grocers to billionaires. This is startlingly low and is a serious problem. His plans for public spending will need to be funded sustainably, and so he must seek to improve this figure. Despite this though Khan will hope that his popular election will inspire his countrymen to contribute to their taxes, especially as he is attempting to stamp out the corruption issue in Pakistan, and use their money to improve their standard of living and not his own.
Even considering the efforts made against the corruption, it has undoubtedly left an indelible mark on the macroeconomic situation in Pakistan. The country not only has very significant foreign debt but has a huge trade deficit. The value of Pakistan’s exports in 2017-18 was at $21.9 billion. But in the same period, the country imported goods worth $57.4 billion. This has resulted in Pakistan having a trade deficit of nearly $35 billion which has increased from $29.4 billion in April. To add fuel to the fire Pakistan has sold off nearly half of its foreign exchange reserves, which plunged to just over $9 billion last week from $16.4 billion in May 2017. The recent oil price increase is also another concern as Pakistan imports about 80 percent of oil needs which it has to pay for with its dwindling foreign exchange reserves. Furthermore but the former minister of finance Ishaq Dar’s policy has led to a build-up of trillions of rupees of circular debt. These are issues which need immediate rectification, as they are themselves the outcome off short-term and short-sighted economic policies. These are large scale issues that will need addressing prior to any plans for expansion by the government.
Moreover, there are also external political pressures which are a potential concern for Khan and Umar. Just this year, Pakistan was added to the Global Financial Action Task Force’s “grey” list of countries to watch for terror financing. This came after Donald Trump accused Pakistan of funding terror groups that attack Afghanistan. If Pakistan is demoted even further, sanctions against it would wreak havoc against the backdrop of a high dependency on imported goods.
As illustrated above there are some major areas for concern for the new government. It seems the cards are stacked firmly against Pakistan from an economic standpoint. However, Khan is not one to die wondering and below are some of the options and opportunities which he does have at his disposal.
Plans for change
Khan and his colleagues are not without idea and there are some opportunities for economic growth in Pakistan. With regards to the issues with currency there are a number of options he is presented with, some more feasible than others. The first and the least likely is to abandon the dollar currency peg which the rupee is currently held against and to allow it to float. Due to the large current-account deficit the rupee would plummet, making imports more expensive due to inflation. Thus this option is almost an impossibility.
The second option is to ask for a bail-out from China, which is looking more and more likely. Crucially, Umar has said on record that he is considering this option as opposed to going to the IMF. Already, Pakistan has taken $60 billion worth of loans from China, much of which is for the development of the China-Pakistan Economic Corridor (CPEC). The goal of CPEC is to connect China’s north-western region of Xinjiang to Gwadar port of Baluchistan. It is expected to transform Pakistan’s economy and transform its infrastructure. The successful completion of CPEC may generate three to four times more profit compared to the investment and a massive system of roads, railways and pipeline. The construction of the trading links, both metaphorical and literal, is likely to connect 60 countries and bring prosperity to all. It is expected to contribute 2.3 million jobs to Pakistanis in the next 10 years and add 2.5% to the GDP. Thus a large portion of Khan’s success relies on the success of CPEC itself one could argue, and as the army is eliminating any security concerns, its success looks increasing more likely.
However, if for some unforeseen reason the above option fails, Khan would have to yet again ask the IMF for a bail out. This would be their 13th in the past 30 years, with payments still due on the previous instalment. Although it seems less and less likely that this will be an outcome as American-Pakistani relations deteriorate. The United States has the largest voting influence in the IMF and is disinclined to help the nation that was once its strongest ally in the region in the aftermath of 9/11. US Secretary of State Mike Pompeo has openly said that an IMF bailout must not be used to help “repay Chinese debts that Pakistan has incurred under the China-Pakistan Economic Corridor (CPEC)”. This has angered Pakistanis. Umar has retorted by saying that “One friendly advice to the Americans: We’ll worry about our Chinese debt, but I think they better handle their own Chinese debt first.” This heated climate makes it seem clear that Khan will approach the IMF and if he does, he will be swiftly declined. Perhaps more crucially the IMF would restrict Khan’s goals for high public expenditure, the centre piece of his political manifesto.
One friendly advice to the Americans: We’ll worry about our Chinese debt, but I think they better handle their own Chinese debt first.
As an avid cricket lover and the son of a passionate Pakistani, I have high hopes for Khan’s entry into Prime ministership. He has at every stage of his life disproven his critics and never been more invigorated in his cause than when faced with crisis. The greater the crisis the greater his resolve to surmount it. Indeed, the challenges of cricket are far different from that of holding office, however, his relentless struggle in bringing about an end to his predecessor’s corrupt tenure and his own political mantra of helping the poor inspire one to believe in his cause. The issues with the currency and trade deficit will most likely be improved by CPEC. Trade is the main basis for the project and it will transform Pakistan in a trading hub between the East and Central Asia. If Khan can find a way to navigate the immediate economic turbulence, most likely through China and another allied nations, it seems he will be able to implement his vision of a Pakistan built for the people rather than the for the elite.
Hello I am Saqlain.