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* Pakistan should visit the IMF to avoid the currency crisis
* Imran Khan promised reforms to help the poor, raise taxes
IMF bailout conditions may conflict with populist spending promises
* Probable finance minister has not ruled out turning to China
By Drazen Jorgic
ISLAMABAD, July 27 (Reuters) – The stock and bond markets have welcomed Imran Khan's victory in the contested elections in Pakistan, but the former cricket hero faces a currency crisis and put long-term reforms.
Khan's first major economic call will be to decide whether to ease the pressure on the rupee by seeking Pakistan's 12th bailout from the International Monetary Fund (IMF) since the late 1980s. [19659002] Even more difficult will be to persuade more people to pay taxes in a nation famous for tax evasion, extinguishing subsidy taps draining government coffers, and reforming deficit-making public enterprises that governments have struggled to sell.
"The country's position is such that now you can no longer maintain the status quo," said Suleman Maniya, head of research at local brokerage Shajar Capital. The Pakistani central bank has devalued the currency four times since December, weakening the rupee by more than 20 percent, as part of efforts to avoid a $ 305 billion balance-of-payments crisis in the economy. A similar scenario in 2013 led Pakistan to obtain a loan of $ 6.7 billion from the IMF.
As the economy grows to 5.8%, the fastest pace in 13 years, the pressures on Pakistan's current account show no signs of slowing down.
The country's central bank is concerned about rising global oil prices – Pakistan imports about 80 percent of oil needs – and a decrease in foreign exchange reserves plunged $ 9.4 billion last week $ 16 billion in May 2017.
The account deficit increased by 43% to $ 18 billion during the fiscal year that ended June 30, while the budget deficit has swelled to 6.8% of the economy.
"Pakistan is facing the biggest economic challenge in the history of the country," Khan said in his victory speech on Thursday, where he presented a program of reforms.
"Our economy is declining because of our dysfunctional institutions We must repair our governance systems."
If Khan turns to the IMF, the Washington-based body will likely demand cuts in spending to reduce the budget deficit, which could jeopardize its populist promises to improve the lives of the poor in building world class schools and hospitals.
On the way to the countryside, Khan focused on the culture of tax evasion in Pakistan, which prevails in Southeast Asia and means that only 1% of the population pays taxes on the returned.
Increasing this figure would be a big blow to the economy and Khan, who promised to reform the Federal Bureau of Revenue (FBR) in his first six months in power.
He also promised to step up an anti-corruption campaign, even though it may trigger capital flight in a country where vast wealth is not documented, analysts say.
Another immediate goal will be to reform state giants such as Pakistan International Airlines and various power companies, which the previous government has struggled to privatize.
Exotix Capital, a research house, said Pakistan's long-term prospects depended on Khan's ability to improve governance and put an end to the culture of the powerful, tax-evaders who took out public enterprises .
"Otherwise, we are simply in the same direction (advice to investors): buy Pakistan to the IMF and sell before the end of the IMF loan," said Exotix in a research note.
STRUCTURAL CHANGES
Khan's reform ambitions will be reinforced by his close ties with the powerful army and the favorable view of the judiciary of his anti-corruption stance, analysts say.
His better than expected performance at the polls also means that he will be able to form a coalition with a handful of small parties likely to oppose his reforms. "Imran Khan should not be the first choice of an investor to run a country in such a precarious position, but any leader with the ability to form a government and make difficult decisions is better than stalemate." prolonged, "said Carmen Altenkirch, Sovereign Analyst of Emerging Markets at Aviva Investors.
Pakistan's benchmark index has surged by about 3.5% since it became clear on Thursday morning that Khan would get a strong mandate, while Pakistan's sovereign bonds have progressed through the curve.
Khan's economic agenda should be entrusted to Asad Umar, the former managing director of Engro, Pakistan's largest conglomerate, widely expected to be chosen as finance minister. A few days before the vote, Umar told Reuters that a PTI government did not rule out asking for a bailout from China instead of turning to the IMF, which he believed was partly "guilty" "of the economic crisis because it allowed the last government to skip reforms. "The real problem is that the competitiveness of the Pakistani economy has seriously deteriorated – culture after culture, industry after industry become uncompetitive," said Umar, blaming productivity and skill levels of companies, high input costs, lack of scale, and policy intervention in some industries.
"Until you restore this basic competitiveness, we will continue to go through this." (Edited by Alex Richardson)
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