NEW DELHI/ISLAMABAD (Financial Times) -- Pakistan is drawing up plans to seek its largest ever bailout from the International Monetary Fund, with senior finance officials set to present the option to Imran Khan soon after he takes office.
Any loan from the IMF, which officials believe is necessary to resolve the country’s escalating foreign reserves crisis, would see the fund impose restrictions on public spending. Such limits would make it difficult for Pakistan’s charismatic new leader to fulfil some of his election promises such as building an “Islamic welfare state”.
Mr Khan, Pakistan’s former cricket captain, spent the weekend negotiating with potential coalition allies after winning 115 seats — 22 seats short of a majority — and overturning decades of dominance by the country’s two main ruling families.
One government adviser said: “We are in a rough area and need help. I can’t imagine we could do that without the IMF’s support.”
The person said the country was likely to need a loan of between $10bn and $12bn — double the $5.3bn the fund lent the country last time in 2013 — in what would be Pakistan’s 13th IMF bailout.
During the election campaign, Mr Khan pledged to spend public money on providing access to healthcare for all, upgrading schools and expanding the social safety net.
But analysts warned these promises would be hard to fulfil given the reality of Pakistan’s economic situation.
Pakistan’s foreign currency reserves have declined rapidly in recent months, as higher oil prices have pushed up the costs of imports, while exports continue to lag.
According to the latest published figures on July 20, the State Bank of Pakistan had just $9bn in reserves — not even enough to cover two months’ worth of imports.
So far, Islamabad has kept going with the help of loans from Beijing — it borrowed at least $5bn from Chinese commercial banks in the past financial year — and by allowing the Pakistani rupee to depreciate 20 per cent against the dollar. Western economists say they believe the currency is still overvalued and think it could fall at least another 10 per cent.
Mr Khan has not yet said how exactly he plans to deal with the balance of payments crisis he now faces, though he told the FT shortly before the election that his shadow finance minister Asad Umar was developing a policy.
Many analysts, however, believe a return to the IMF is inevitable, and will come with damaging consequences for short-term economic growth and Mr Khan’s own political reputation.
They say the fund is likely to demand a range of actions in return for providing a bailout, including raising electricity tariffs, cutting subsidies for the agriculture sector and selling lossmaking public companies. This year the IMF projects that Pakistan’s fiscal deficit could hit 7 per cent, against a target of 4.1 per cent, meaning the fund is likely to demand deep cuts in planned public spending.
Charlie Robertson, global chief economist at Renaissance Capital, said this could lead to a 1 percentage point slowdown in gross domestic product.
He added: “This is the first time Imran Khan gets his hands on power and he is going to have to make some very tough decisions. He will have to break election promises, at least in the short term.”
One other option remains open to Mr Khan: he could seek to negotiate a deal with Saudi Arabia to defer oil payments, something the Gulf country agreed to in 1998.
Sakib Sherani, a former adviser to the finance ministry, estimated that energy-related imports could account for a third of the country’s total imports this year. “An economic slowdown may also curtail energy imports but still this would be huge,” he said.