Economic Crisis Awaits Imran Khan

ISLAMABAD: International journal Bloomberg has said that an economic crisis is waiting for Pakistan Tehreek-i-Insaf (PTI) Chairman Imran Khan as he is poised to become the next prime minister of the country after winning the July 25 general elections.
A new government under Pakistan’s incoming leader Imran Khan will need to move quickly to tackle a brewing economic crisis, Bloomberg said in its report detailing the challenges faced by the country. It says that in the current scenario, the country will need $10-15 billion loan from the International Monetary Fund (IMF), whose attainment will be a difficult stage as the organization will condition it with implementation of a reforms agenda that also includes privatization and broadening of the tax net. Economic growth may also be affected from the IMF programme, it added.
The Bloomberg report maintains that rising deficit of the released accounts will be a problem for the incoming government. The new government will also have to support the depreciation of the falling foreign exchange reserves.
After victory in Wednesday’s election, Imran Khan said in a televised address he will focus on improving the lives of the poor and fighting corruption.
One of the first challenges, he will need to tackle is easing a foreign-reserves crunch. The nation’s buffers have been steadily dwindling as result of surging imports and debt, forcing the central bank to devalue the currency four times since December. All of that comes against a global backdrop of higher oil prices, trade war tensions and an emerging-market sell-off.
For many Pakistan watchers, a bailout from the International Monetary Fund may be an inevitable next step. “Painful, as it may be, an IMF program is unavoidable,” said Ehsan Malik, chief executive officer at the Pakistan Business Council in Karachi. “The government and the opposition should unite to use it to address the immediate problem and fundamental flaws that have seen manufacturing’s role in the economy decline.”
Pakistan’s reserves have dropped at the fastest pace in Asia to $9.1 billion, according to data compiled by Bloomberg. Reserves are now below the level reached when the country approached the IMF the last two times for a bailout, according to Bilal Khan, a senior economist at Standard Chartered Bank Plc.
Low reserves mean the nation has less funds to pay for much-needed imports to keep economic growth going and for the central bank to maintain currency stability.
If Pakistan heads to the IMF for aid, it won’t be the first time. The nation has had 12 loan programs with the IMF since the late 1980s and may seek between $10 billion and $15 billion from the Washington-based lender in upcoming months, according to Karachi-based Insight Securities.
The loans typically come with conditions such as reigning in fiscal deficits and tighter monetary policy. Pakistan’s central bank has already increased interest rates three times this year to 7.5 percent.
“The IMF will not be that easy this time around,” said Ali Hussain, head of research at Frontier Investment Management Partners Ltd in Dubai, which handles $2 billion in assets. “Lots of structural reforms were delayed or not done last time. They will be much tougher in the enforcement process, whether its privatization program, revamping the tax infrastructure, widening the tax net, it’s not going to be easy on the ground level.”
The trade gap has widened despite multiple measures to restrict imports and spur exports over the past few months. That’s driven up the current-account deficit by 42 percent to $18 billion in the year through June.
An economic growth boom and billions of dollars in Chinese-built infrastructure has fueled demand for imports and added to the nation’s debt. Moody’s Investors Service cut the nation’s credit-rating outlook to negative from stable as external balances weakened.
Any IMF loan may come with tough measures to narrow the current-account gap, which may have a knock-on effect on economic growth, said Hamad Aslam, director research at Elixir Securities Pakistan Pvt in Karachi. The economy is expected to slow for the first time in six years to 5.2 percent in the year starting July, according to the average of six economists surveyed by Bloomberg.
Over the longer term, authorities will need to find ways to boost exports to improve the current-account balance. Tariffs currently favour commercial imports over manufacturing and “if the country fails to address these fundamental flaws, the imminent IMF program will not be the last,” said Pakistan Business Council’s Malik.
One of the structural problems a new government will need to fix is low tax compliance. While Pakistan has increased its tax-to-GDP ratio in recent years to 12.5 percent in the year through June, that’s still among the lowest in Asia and globally.
Most of the government’s tax revenue comes from indirect levies, and there’s a huge pool of untaxed money in real estate and savings instruments, as well as non-declaration of income that can be tapped, said Shabbar Zaidi, a partner at Karachi-based AF Ferguson & Co. That could help the nation double tax revenue to 8 trillion rupees in two years, he said.
Published in Daily Times, July 28th 2018.

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