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By Saeed Shah/Wall Street Journal
Islamabad, April 1: The tussle to oust Pakistan Prime Minister Imran Khan will likely be decided within days. For the winner, the much bigger challenge ahead will be to fix an economic crisis that threatens to leave the country unable to pay its debts.
Fueled by the war in Ukraine, surging oil and food prices have worsened Pakistan’s ballooning trade deficit and pushed up the cost of living for the country’s 220 million people. Mr. Khan’s efforts to soften the impact through state subsidies and tax breaks have compounded the problem by jeopardizing a bailout from the International Monetary Fund.
Pakistan’s opposition says it now has the votes needed to topple the government after enough MPs from the ruling coalition switched sides.
As they smell victory, opposition leaders fear they will inherit the blame for the state of Pakistan’s economy and the inevitable pain from the steps needed to fix it.
“The economy is in a precarious position. The government has been on a borrowing spree,” Miftah Ismail, tipped to be the new finance minister, said in an interview. “We’re going to do what we need to do to put Pakistan on a path to recovery.”
Pakistan’s economy has for decades limped from one crisis to another, unable to sustain the growth needed for its young and fast-expanding population. Gross domestic product per capita of less than $1,200 a year is more than a third lower than India’s, making Pakistan the 183rd poorest country globally, World Bank data show.
The country is on its 22nd bailout under IMF supervision since first turning to the lender in 1958.
In its defense, Mr. Khan’s government points to how the country weathered the Covid-19 pandemic with relatively little damage to the economy—GDP shrank 0.5% in 2020, before returning to growth. It also found the resources to increase cash handouts to the poorest and an initiative allowing people to use private hospitals at government expense.
The economy grew 5.4% in the year to June 2021, according to the government, which says it expects growth to again be around 5% this financial year.
Inflation has dogged Mr. Khan. Though prices—and economic growth—were moving higher before he took over in August 2018, they have accelerated, with the benchmark consumer-price index averaging 11% over the past 9 months. With food, energy and transportation the biggest contributors, the soaring cost of living has eroded Mr. Khan’s popularity.
Russia’s invasion of Ukraine sent prices of oil, wheat and other commodities surging beyond the reach of many developing countries. Sri Lanka, for example, has been pushed to the verge of default in recent weeks as a soaring import bill drained financial reserves.
Pakistan stands out as one of the most vulnerable developing economies because of its high debt burden—interest payments already eat up 40% of government revenues, and global rates are rising fast, says Renaissance Capital, an investment bank focused on emerging markets.
Mr. Khan in late February announced a $1.5 billion subsidy on fuel and electricity for four months and a tax amnesty for industry without first seeking approval from the IMF. The fund has previously pressed Pakistan to end broad-based subsidies, favoring more targeted help for the poor, and opposes tax amnesties. The IMF paused payments from Pakistan’s bailout program, under which it must stick to agreed limits on spending and other fiscal measures.
Finance Ministry spokesman Muzzammil Aslam said the subsidies were an emergency response to rising energy costs, and would be funded from the higher tax revenues achieved under Mr. Khan. He added that the government deserved credit for having dealt with multiple challenges, including the pandemic, regional conflicts and the IMF’s tough conditions.
Pakistan was due to receive $3 billion from the IMF by September, when the current program ends.
If the IMF program can’t get back on track and a new loan secured, a widening trade deficit could wipe out foreign exchange reserves and leave Pakistan bankrupt by the middle of next year, warns Renaissance.
“Pakistan is trying to give away money to help people face the crisis, relations with the IMF are bumpy, and then this government is going to get kicked out because it hasn’t done enough,” said Charles Robertson, the firm’s chief economist. “The risk of default in 2023 is quite high. It can be avoided with a new IMF program.”
IMF representative Esther Perez Ruiz described continuing talks with Pakistan as constructive.
The central bank said March 31 that it holds foreign exchange reserves of $12 billion, or enough to cover about two months of imports—which jumped 49% in the first eight months of the financial year ending June 30. A cushion of three months is typically seen as the minimum needed for governments to tap international financial markets.
Meanwhile, the government’s finances have been shored up by loans from Saudi Arabia and China—raising concerns in Washington about the growing influence of strategic rival Beijing.
Moody’s Investors Service, the credit rating agency, said in a report Thursday that the planned no-confidence vote adds to policy uncertainty.
The opposition is itself an unwieldy coalition of more than half a dozen parties, which may make it harder to make tough and potentially unpopular economic decisions.
Mr. Ismail, a finance minister under former Prime Minister Nawaz Sharif, said Pakistan must first complete the current IMF program, and regain the confidence of global investors so it can sell bonds.
Pakistan’s repeated IMF bailouts were due to its failure to expand exports and boost foreign reserves, Mr. Ismail said.
“We have been pursuing import substitution, when we should have been pursuing export promotion,” said Mr. Ismail, a former IMF employee with a doctorate in public finance from University of Pennsylvania’s Wharton School. “We need a paradigm shift in thinking.”
(Write to Saeed Shah at saeed.shah@wsj.com)
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