NEW DELHI -- Facing shrinking currency reserves and a crippling fiscal deficit, Pakistan is scrambling to head off a full-blown economic crisis by slashing spending and seeking lifelines from potential lenders.
The government has this month revised its budget for the year ending in June, imposing spending cuts and a tax increase of roughly 180 billion Pakistani rupees ($1.46 billion). Prime Minister Imran Khan also visited Saudi Arabia recently, where the Islamic Development Bank is based, to seek assistance.
Pakistan could turn to the International Monetary Fund but hopes to avoid this option. The Washington-based organization would likely demand details about funding for the China-Pakistan Economic Corridor, or CPEC, a series of Beijing-led infrastructure projects, and ask that the initiative be scaled down.
Resolving the country's currency crisis, however, is an urgent task for Khan, who took power last month. Pakistan's foreign currency reserves have fallen by half in two years to just $9.3 billion on Sept. 14, according to the country's central bank. That will cover less than two months of imports, and may force the country to miss some foreign loan payments.
The economic corridor infrastructure project, which kicked in to full gear in 2015 as part of China's Belt and Road Initiative, drastically reduced Pakistan's foreign reserves by increasing its trade deficit and external debt. Current-account deficits subsequently invited selling of the home currency.
Austerity measures are inevitable for Pakistan. The additional tax burden, however, will fall solely on the highest earners, Finance Minister Asad Umar said at a news conference on Sept. 18.
Income taxes will be raised to 25% for those making over 200,000 rupees a month, and the excise duty on automobiles with engines larger than 1.8 liters will be increased to 20% from 10%. Duties on auto imports and tobacco will also be raised.
Khan and his Pakistan Tehreek-e-Insaf party won July's election by promising to create an "Islamic welfare state," but the spending required to do that will have to wait.
The government cut development expenditures to 725 billion rupees from 800 billion rupees in the provisional budget proposed by then-Prime Minister Shahid Khaqan Abbasi's administration in May.
Umar accused the previous government of overestimating revenues by 350 billion rupees and underestimating expenditures by 250 billion rupees. The budget deficit in fiscal 2018 through June was 6.6% of gross domestic product and will rise to 7.2% without austerity measures, he added.
Pakistan's tax revenue is 12% to 13% of its GDP, according to an IMF report out this spring, but external payments were about 7.5% of GDP in fiscal 2018 and are expected to surpass 9% in fiscal 2020. Islamabad must therefore secure funds to repay debts through austerity measures while trying to balance the budget.
After releasing the budget plan, Khan traveled with Umar to Saudi Arabia in his first trip overseas as prime minister, which also included a stop in the United Arab Emirates. Pakistan discussed investment deals with Saudi Arabia, including inviting Saudi Arabia as third country partner in CPEC. A Saudi delegation is visiting Pakistan in the first week of October to seal the deal. Khan’s visit was also likely aimed at securing aid from the Islamic Development Bank and deferred payments on oil imports.
Pakistan will need to increase its currency reserves by $10 billion to $12 billion in the next twelve months, estimates Sushant Sareen, a senior fellow at the Indian think tank Observer Research Foundation. While Islamabad is reportedly seeking $4 billion from the development bank, it is also believed to be receiving bridge loans from China.
Another focal point is whether Pakistan will accept assistance from the IMF, which it has turned to for funding 13 times since the 1980s. It has received a total of $6.1 billion in foreign currency from 2013 to 2016.
Because the need for foreign currency is greater this time, Islamabad will have to seek help from multiple countries and organizations, Sareen said. But asking the IMF for support could pump the brakes on CPEC projects, which Khan and Chinese Foreign Minister Wang Yi, who visited Pakistan from Sept. 7-9, recently agreed to accelerate.