"The path of the thorns": an IMF rescue plan to hinder the populist agenda of the Pakistani Prime Minister

ISLAMABAD (Reuters) – From cuts in subsidies to currency devaluation fueling inflation, Pakistan's tough choices to bail out the International Monetary Fund (IMF) are a headache for the new prime minister populist Imran Khan.

Pakistani officials met with representatives of the IMF this week in Bali and formally called on the 13th Islamabad rescue plan since the late 1980s to give the economy room for maneuver, while implementing reforms aimed at to end decades of cycles of recession.

In addition to lending billions of dollars to the nuclear-weapon state to avoid another balance-of-payments crisis, the IMF should now force Islamabad to put a lot more resources into implementing the structural reforms needed to rebalance of the economy and a reduction in spending that stimulated growth outside the government budget.

Talks with the IMF have been launched and the CEO, Christine Lagarde, has already said that she would demand "absolute transparency" of Pakistan's debts, including those due to the closure of the alliance with China. .

Any reform mandated by the IMF would pose a threat to Mr. Khan's noble election promises, such as his desire to create 10 million jobs and to create an "Islamic social state" inspired by the ideas originally expressed by the Prophet Muhammad. in the holy city of Medina.

Khan was elected in July with the support of many poorer Pakistanis, desperate to change a country with an illiteracy rate of over 40%, poor health care and unemployment or underemployment among the 208 million inhabitants of the country.

The creation of 10 million jobs would require economic growth of 8%, but this can only be achieved with economic shock therapy that in the short term will stifle growth well below 5.8%. % reached in June, according to economists.

"The path to Medina is full of thorns, not roses," said an expert from an international donor agency, who refused to identify himself because he is not allowed to speak about the issue.

"To get there, they have to go through these painful steps now."

The IMF predicted this week that Pakistan's growth will slow to 4 percent in 2019 and fall to around 3 percent in the medium term.

A sharp rise in oil prices – Pakistan imports about 80 percent of oil needs – contributed to a current account deficit that widened from 43 percent to $ 18 billion during the fiscal year closed on June 30th. The weakness of the Pakistan rupee also contributed to the rise in local prices. price of energy.

On Wednesday, Khan blamed the previous government for economic disorder and urged Pakistanis to remain calm.

"I want to say to all of you to stay strong and not to panic. It's a very short time that will go away. "

"FEND FOR NOURSELVES"

As Leader of the Opposition, Mr. Khan has vowed never to "beg" IMF money and has come to power on an anti-corruption platform with a promise to implement essential reforms, notably the widening of the country's tax net and the reform of loss-making enterprises. state enterprises.

But local and foreign investors welcomed rescue talks, saying Pakistan's economy needed IMF protection because of rising oil prices and the turmoil of emerging markets. However, they also warned against more difficult conditions compared to 2013, when Islamabad had been subject to repeated hesitation and avoided harsh reforms after receiving a $ 6.7 billion loan from the IMF .

"It's better to get into a well-structured IMF program than to try to fend for yourself," the Pakistan Business Council said in a statement.

At a glance at the IMF, which described the rupee as "overvalued," Pakistan's central bank on Tuesday made its fifth devaluation since December, dropping the rupee by 7.5 percent to bring losses to 26 percent. % in the last 10 months. More devaluations are expected.

The bank has also raised its main interest rate by 275 basis points since January, to 8.5%, and analysts believe that further increases are on the horizon.

Devaluations have fueled inflation fears and put additional pressure on debt service, which is a major concern for the new government. Debt service costs are expected to represent 35% of the fiscal year budget until next June, according to the predictions of the previous government. Officials are now waiting for the debt-to-GDP ratio to exceed 70%.

"We really need to get out of this trap of debt dependency," Muhammad Hammad Azhar, Pakistan's Revenue Minister, told Reuters.

He added that the government was planning to restructure certain loans contracted abroad, but did not give details.

The Khan government attributes many of Pakistan's current economic difficulties to the previous administration's "strong rupee" policy, which made Pakistan's exports uncompetitive. The central bank also burned foreign currency reserves to defend the rupee.

Reserves fell 41 percent this year to $ 8.3 billion, or about 1.6 months of import coverage, while China lent billions of dollars to Islamabad to support the currency.

LOANS FROM CHINA

China has made Pakistan a flagship country as part of its extensive road and road infrastructure construction program, pledging about $ 60 billion in funding for ports, railroads and railways. roads. But the growing debt level has led Islamabad to reduce by about $ 2 billion the size of the larger Belt and Road project.

US Secretary of State Mike Pompeo said there would be "no reason" to bail out Pakistan through the IMF, which would repay Chinese bonds.

Khan's administration has also asked China and Saudi Arabia, another historic ally of Islamabad, to help him support the economy, but they appear to have hesitated to come to the rescue of Pakistan.

Although the scale of any bailout is unclear, Khan suggested this week that Pakistan needs $ 10 billion to $ 12 billion. In addition to the IMF, the World Bank and the Asian Development Bank should lend money, as they did in 2013. China and Saudi Arabia could also contribute.

Last week, the IMF congratulated Pakistan for limiting gas and electricity subsidies, raising interest rates and devaluing the currency. But he warned that Islamabad must go even further in all these areas.

Pakistani officials say they are ready to take tough measures, but hope to broaden the tax base and generate more revenue instead of relying solely on austerity to offset a budget deficit of 6.6 percent of GDP. GDP at the end of June. They also want to help boost exports further.

Azhar said Khan's party had been elected as part of a reform program and that it would impose changes "regardless of the IMF bailout."

On Wednesday, Khan launched a program to build five million homes for the poor, a major campaign promise. But he did not explain how the government would pay for it.