Pakistan Braces for Economic Reform After Disputed Election

Kristian Rouz — Pakistan's new Premier, Imran Khan, is facing a tough challenge of a looming currency crisis, which could escalate into a full-blown recession. Khan, however, has laid out the key principles of economic reform aimed at boosting tax revenues and improving the quality of life for many Pakistanis.

Just days after his disputed victory in a general election, renowned cricket star Imran Khan is preparing to overhaul his country's economy. Praised by the media as a "Pakistani Trump", and cheered by the nation's stock and bond market participants, Khan is seeking closer cooperation with the International Monetary Fund (IMF) to finance his ambitious reforms.

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Pakistan is currently on the verge of a currency crisis, next in line to the likes of Argentina, Turkey, and South Africa — who have all experienced currency devaluations earlier this year due to subdued global commodity prices, structural hurdles, and the rising US dollar because of the Federal Reserve's policy tightening.

Khan is set to seek the country's 12^th IMF credit line to avoid the crisis, but the Fund's tight requirements for reforms, fiscal austerity, and transparency could result in Pakistan turning to mainland China instead. Beijing is advancing its Belt and Road initiative by financing development projects across Asia with no visible strings attached — and Khan might consider this path as a more attractive one.

"The country's position is such that now you can no longer sustain the status quo," Suleman Maniya of Shajar Capital said. "Speed is of the essence."

Following his election this past Wednesday, Khan said in a televised address he would focus on improving the lives of the poor and fight corruption. This comes after the Pakistani central bank has devalued its currency four times since December, facing a decline in reserves, as well as a rise in imports and national debt.

The Pakistani rupee settled at 128.05 per dollar following Khan's election, but under the current circumstances, it is bound to continue its decline.

This comes as the rupee has plunged some 20 percent since December, whilst the Pakistani economy is still growing at quite a robust pace of 5.8 percent per year.

"Painful, as it may be, an IMF program is unavoidable… to address the immediate problem and fundamental flaws that have seen manufacturing's role in the economy decline," Ehsan Malik of Karachi-based Pakistan Business Council said.

Amongst the top-priority items on his agenda, Khan highlighted reform of state-controlled enterprises, and pledged an increase in budget spending aimed at supporting economic growth.

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Additionally, Pakistan could see an increased role for the latest financial tool by encouraging greater usage of crypto-currencies in its domestic and international transactions. This is despite the Pakistani central bank having banned operations with Bitcoin and cryptocurrencies — not least, due to the threats of terror financing.

There are currently just 57 people in Pakistan trading Bitcoin, according to data from LocalBitcoins.

"People are turning to cryptocurrency as an investment, but slower than the western world as the literacy rate is lower here and it's a totally new phenomenon for them," Abu Shaheer, who introduced cryptocurrency Pakcoin, said.

Foreign trade poses another challenge to Pakistan. The Asian nation's trade deficit increased 43 percent year-on-year in June to $18 billion — driven mainly by elevated oil prices, as Pakistan imports roughly 80 percent of its petroleum. Additionally, budget deficit rose to 6.8 percent.

In this light, Khan's pledges to improve living standards in the country might be at odds with the IMF's bailout conditions. But the newly-elected premier says many of the country's problems could be addressed by administrative reform, which could save the budget a lot of money currently being misspent.

"Our economy is going down because of our dysfunctional institutions. We need to fix our governance systems," Khan said.

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Khan is also aiming to restore the international competitiveness of Pakistan's economy, which is still heavily reliant on commodity exports. Experts say low labor productivity, high input costs, and governmental overreached have hampered the efficiency of Pakistan's economy.

The new premier appears to have acknowledged all the challenges facing Pakistan, and his decisiveness has already translated into a resurgence of the nation's stocks, bonds, and sovereign dollar bonds overseas.

"Any leader with the ability to form a government and take hard decisions is better than a protracted stalemate," Carmen Altenkirch of Aviva Investors said.