Pakistan’s Khan stuck between IMF and public with crisis budget due

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Pakistani Prime Minister Imran Khan’s government is due to present its budget for the fiscal year through June 2020 next Tuesday, with the country bracing for a raft of belt-tightening measures to address an out-of-control deficit.

Economists warn the government may have to come up with a combined 700 billion rupees ($5 billion) worth of expenditure cuts and new taxes to satisfy the International Monetary Fund, which is negotiating to loan the country $6 billion over the next three years. “The scale of adjustments required in one go from Pakistan is probably the most difficult in our country’s history,” said a finance ministry official in Islamabad, who spoke to the Nikkei Asian Review on condition of anonymity.

Since late 2017, the Pakistani rupee has lost nearly 50% of its value against the U.S. dollar — the main foreign currency used in Pakistan’s international trade. Independent economists estimate that annualized inflation ahead of the budget is hovering at around 9%. Opposition leaders, meanwhile, are heaping criticism on the government over the economic fallout from a campaign against corruption.

Khan’s Pakistan Tehreek-e-Insaf, known as the PTI or Pakistan Justice Party, came to office following parliamentary elections in 2018. It replaced the Pakistan Muslim League — Nawaz, or PML-N, led by former Prime Minister Nawaz Sharif, who was dismissed in a Supreme Court verdict in July 2017, in a trial sparked by Panama Papers revelations of his family’s offshore wealth.

Asif Ali Zardari, a former president who leads the opposition Pakistan People’s Party, last month warned publicly that the “revival of the economy and curbing corruption cannot go on together.” Zardari’s words echoed criticism from other opposition leaders and businesspeople that the National Accountability Bureau’s intense pursuit of alleged corruption in recent months has only weakened corporate sentiment and raised uncertainty.

Government officials reject such criticism. Iftikhar Durrani, an aide to Khan, told Nikkei: “Ending corrupt practices should encourage genuine investors that they will be able to invest in Pakistan in a secure environment. Why should it undermine confidence?”

In any case, analysts warn that the tough measures expected in the budget will trigger public resentment and darken consumers’ mood. “We have seen reports of expected increases in tariffs for electricity and gas in the next financial year,” said one Western economist in Islamabad who asked not to be named.

“I think in the coming months, as the budget unfolds and the cost of living in Pakistan rises, there will be resentment on the streets,” he added. “The risk of a backlash will grow.”

Abdul Hafeez Shaikh, Khan’s adviser on finance and economic affairs and the man who negotiated the outlines of the IMF loan, believes the fretting over the terms is exaggerated.

“We have had IMF programs in the past. The agreement [between Pakistan and the IMF] focuses on fiscal consolidation and improving the balance of payments,” Shaikh told journalists in the last week of May. “The prescriptions [from the IMF] are those that are good for Pakistan to adopt.”

Still, opposition politicians and independent analysts argue the reforms required by the IMF present an unprecedented political risk.

One central reform element will involve reducing tax evasion in a country where only 1% of the population pays income tax. For years, international financial institutions including the IMF have urged successive governments in Islamabad to bring more Pakistanis under the tax net, to no avail. To this day, many powerful businesspeople, owners of large agricultural estates and property investors are not paying.

Additionally, past efforts to expand the sales tax regime through tighter controls of daily transactions were met with stiff resistance from business associations.

Khan is also likely to run into opposition from the unions that dominate money-losing state enterprises, if he tries to turn the businesses around through layoffs. The list includes Pakistan International Airlines and Karachi Steel Mills, the country’s largest steel factory, along with electricity and gas utilities.

One opposition leader who served in Sharif’s cabinet said Khan is sure to find reform a formidable challenge.

“Every step of the way to carry out reforms will be extremely tough for this government,” he said on condition of anonymity. “Once there is a backlash from the unions, the government would very quickly find itself surrounded by growing opposition.”

The opposition leader concluded: “I don’t think carrying out reforms in line with the IMF’s demands is going to be easy or even possible.”