The Kashmir Monitor
By Raza Agha
The verdict is out. Tehreek-e-Insaf (PTI) it is, although not quite as decisively as the powers that be wanted. Coalition governments are in the offing in the centre, Punjab, and perhaps even Balochistan. Inclusive of Khyber Pakhtunkhwa, no party since the PML-Q in 2002 (or the PML-N in 1997) has achieved these results. That though is just the start, and not a great one. For one thing, denying the largest party in Punjab the right to government hardly sets the scene for cordial relations with the opposition. That’s all the more true, as PTI governments in Punjab, Balochistan and the centre will be dependent on independents and smaller parties. History tells us that not only do they spook easily, they are also easily bought. It is also worth recalling that the last time both the Pakistan People’s Party (PPP) and the PML-N were in opposition, they were central in bringing down the Musharraf government, which enjoyed a strong position internationally and a strong domestic economy.
Meanwhile, besides a seasoned opposition, PTI also faces an activist judiciary, a potentially unsupportive bureaucracy (publicly humiliated and promised forced change), expectations of the deep state and Islamists reeling from defeat. And the streets are their domain. The political environment will also be challenging because while Pakistanis are optimistic, they are impatient. This is a country where gulab jaman distribution scenes are as frequent as government changes. The problem has worsened now, as both the electorate and the media will judge PTI with the same yardstick it used to judge others. All this at a time when the electorate’s sense of optimism is tangibly stronger than the early days of Musharraf’s incumbency.
But if there is one thing Musharraf’s term showed, it was that governments should do what they can, and do it quickly. Time is not PTI’s friend. Not only will it be hard to keep the party intact if the current leader fails, there is also a long history of the deep state falling out with (selected) elected political leaders, very quickly if they are honest, popular and eventually try to fly solo. There was Fatima Jinnah in the 60s; Bhutto in the 70s; Junejo in the 80s; Benazir and Nawaz in the 90s; PML-Q in the 2000s; and Nawaz again in the 2010s. In contrast, succession and resilience post leadership change are clearer and proven in the PPP and PML-N. This is likely not lost on either; certainly not on the independents and smaller parties.
On the spending side, PTI’s position appears one of austerity and perhaps recalibration towards human development. If these objectives are formulated in a revised budget, it would be positive for an IMF program
Managing these dynamics is difficult in the best of times. To do it as a first time incumbent with no policy experience in a coalition government facing a tough economy and weak geopolitical position is unprecedented in Pakistan’s history. On the economy, the immediate challenge is external liquidity. Enter the IMF. An orthodox program will call for aggregate demand management led by fiscal retrenchment and supported by tight monetary policy and exchange rate flexibility. Indeed, for over a year, the IMF has talked of “significant” revenue efforts, power sector arrears, a “rebalance” of federal-provincial relations, raising power tariffs to “full cost recovery”, fiscal discipline, SOEs losses, exchange rate flexibility and tighter monetary policy.
On the fiscal to-do list, part of PTI’s messaging has been doubling tax collection by creating a tax paying culture and ensuring prudent, transparent and accountable spending. Over what timeframe this shift is to take place remains unclear for now. On the spending side, PTI’s position appears one of austerity and perhaps recalibration towards human development. If these objectives are formulated in a revised budget, it would be positive for an IMF program. For the external sector, aside from medium term plans of raising tourism and tapping expatriates, Imran Khan’s views in the lead-up to the elections have oscillated between IMF loans increasing poverty and Pakistan repudiating IMF and World Bank loans, that the IMF should stop aiding Pakistan and more recently the possibility of approaching the IMF.
Whether this happens does not only depend on what the new government wants. The US has taken issue over the perceived use of US tax payers’ money via an IMF program to pay Pakistan’s Chinese creditors. This is, at best, an uninformed view. As of February 2018, Chinese bilateral debt was only 13 percent of Pakistan’s public and publicly guaranteed external debt. Meanwhile loans contracted from Chinese banks between July 2016 and February 2018 stood at $3.3billion (with 2 to 3 year maturities). There is an additional $500 million in deposits from China’s State Administration of Foreign Exchange.
All in, debt servicing on Chinese bilateral debt was $900million in the 2017 Fiscal Year (FY) while FY18 interest costs on all contracted Chinese bank debt should have amounted to about $180million. Together that’s $1.1billion to service Pakistani obligations to China. To help contextualise this — total external debt servicing in FY17 was $6.8billion. And that’s not even half the problem that the IMF needs to help with. Pakistan’s current a/c deficit is sitting at $18billion. Even assuming a reduction in FY19, Pakistan’s gross external financing needs amount to over $25billion. The $1.1billion we will pay the Chinese annually is not even 5 percent of this. Furthermore, IMF resources are never sufficient to fund any borrowers’ entire external financing needs — they help lock other avenues. IMF staff know this. The question is whether they will let US officials know. If not, there is plenty of history of the IMF playing hardball with borrowers.
