Will IMF loan bring stability and investment to Pakistan?

When Pakistan faced Australia in the 1992 Cricket World Cup, they were on the brink of elimination with only one win from their first five games. Pakistan’s then captain Imran Khan said in a pre-match interview that he wanted his team to “fight like cornered tigers”. Not only did they beat Australia on the day, ‘Imran’s tigers’ went on to win their next five games, on their way to recording Pakistan’s first and only World Cup victory.

Twenty-seven years later, Mr Khan is attempting to lead the country out of an even tighter corner than in 1992, having taken office as prime minister in August 2018. Despite securing multi-billion bilateral loans from China, Saudi Arabia and the United Arab Emirates since then, Pakistan’s foreign exchange reserves had dropped to $7.3bn at the end of June 2019, raising fresh concerns over its ability to meet its financial obligations.

Falling foreign exchange reserves, combined with weak growth and twin deficits, have forced Mr Khan to agree Pakistan’s 13th bailout from the IMF since 1980, after previously tweeting that he would “prefer death than to beg from the IMF”. 

Structural weakness 

In approving the $6bn loan on July 3, the IMF said the programme “aims to support the authorities’ economic reform programme”, citing “structural weaknesses, including a weak tax administration and a challenging business environment” as prominent issues facing Pakistan. 

Syed Haroon Qidwai, director of Pakistan’s Federal Board of Revenue (FBR), says the government has “initiated a reform project of $100m to restructure the FBR”, its top federal body for monetary and tax-related crimes. This includes Mr Khan’s plans to replace FBR members with sector experts, and his pledge to personally oversee the audit of FBR officials. 

Mr Qidwai adds that the reforms are designed to increase the country’s tax base, as less than 1% of its 208 million population currently fill tax income returns.

“Mr Khan is taking strict actions and managing the whole set-up very prudently,” says Mr Qidwai. “The government is improving the overall transparency of the set-up and integrating the banking sector to collaborate with the FBR and the National ID Card Issuing Authority to identify tax evaders.” 

Positive energy

Gareth Leather, senior emerging markets economist at Capital Economics, says that despite a “pretty grim situation in Pakistan, there is some reason for optimism due to [China’s] Belt and Road Initiative [BRI], as there are signs it is leading to improvements in the country’s infrastructure, especially in roads, trains and energy”.

Over the past decade, frequent and widespread electricity shortages have caused factories and households across the country to be offline for four to eight hours a day, which has deterred foreign investors from setting up manufacturing plants in Pakistan. However, Mr Qidwai says the China-Pakistan Economic Corridor (CPEC) “has partially resolved the energy crisis”, since China has committed more than $60bn of investment in Pakistan’s energy sector and infrastructure under the CPEC, a centrepiece of the BRI.

Car production in Pakistan rose to a record 218,000 units in 2017-18, a 16% increase on 2016-17, according to statistics from the Pakistan Automotive Manufacturers Association. Speaking to fDi Magazine, the former vice-president of Deutsche Bank Pakistan, Rashid Masood Alam, cited this “decrease in domestic and industrial electricity load-shedding” as a driver of increased manufacturing in Pakistan.

Although overall foreign investment in Pakistan dropped by more than 55% in the 2019 fiscal year, FDI inflows into the manufacturing sector increased to $938m in the same period, according to statistics from the State Bank of Pakistan. In a tweet, finance minister Asad Umar said: “The surge of foreign investment in the manufacturing sector during this year is a very positive economic indicator.”

The rise in manufacturing FDI is set to continue as South Korea’s Kia Motors has announced plans to begin commercial production of vehicles in Pakistan by September 2019. Kia is one of eight new prospective entrants in Pakistan's automobile sector, including Renault, Audi and Volkswagen.

FDI prospects 

Improvements in the energy structure and bureaucratic transparency have pushed Pakistan to 136th place in the World Bank’s Ease of Doing Business ranking for 2019, up 11 places from the 2018 ranking. At a meeting with Mr Khan in November 2018, Mike Spanos, CEO of PepsiCo for north Africa, the Middle East and Asia, said: “We are seeing continued progress in those areas. As the ease of doing business in Pakistan improves we want to continue our investments.” Mr Spanos pledged an additional $200m alongside PepsiCo’s $500m investment in the country, and is planning a further investment of $1.2bn in the next five years.

Capital Economics’ Mr Leather says a more stable economy will make Pakistan more attractive to foreign investors, and that “the IMF loan will help Pakistan escape from boom-bust cycles”. 

Beyond the budget

The ambitious budget implemented in the light of the IMF loan aims to reduce public debt, build resilience and restore macroeconomic stability and possibly raise the country’s FDI profile. Pakistan's FDI-to-GDP ratio stood at 0.9% in 2018 – on a par with Bangladesh, but well below India’s 1.5% and south Asia’s average of 1.4%, according to figures from the World Bank. 

Mr Khan is using his international connections to attempt to restore the economy and raise Pakistan's profile with foreign investors. The IMF agreement, while a bitter pill to swallow for many in the country, including the prime minister, underlines his commitment to a reform agenda. 

Under the Public Sector Development Programme 2019-20, the government has taken new initiatives such as interventions in agriculture to ensure food security, the construction of mega-dams for water conservation, and proposals to enhance the skill development of youths in the field of the knowledge economy. 

The Annual Plan 2019-20, released by the government in June, aims for net FDI to reach $4.34bn in 2019-20 (compared with the estimated $1.69bn at the end of the current fiscal year). The plan highlights proposals to improve the capacity of the IT sector by enhancing infrastructure facilities, improving labour force skills and accelerating the implementation of a public e-service. 

Hit for six?

When Mr Khan was elected as Pakistan’s 22nd prime minister in June 2018 – 22 years after forming his own political party – thousands of flag-waving supporters rallied behind his claim that he would “deliver a new Pakistan”. 

However, just one year later, many of his followers oppose the changes implemented in order to secure the IMF loan, including higher taxes and utility prices, tougher discipline on provincial spending, and, if required, increasing short-term inflation and curbing growth. In July, business owners and factory workers across Pakistan protested against the government’s tough post-IMF austerity plans. 

This mounting internal pressure is set to increase, with businesses warning that they will increase their resistance to the IMF agreement, including a refusal to pay higher taxes. Now the government’s economic worries are compounded with a severe backlash against the measures introduced to combat these problems. 

Where once Mr Khan’s charisma and drive were enough for him to succeed as cricket captain and street campaigner, it remains to be seen whether the ‘cornered tiger’ can fight back, and bring Pakistan with him.