Pakistan’s Muslim League Standing Streak

Pakistan shares led Asian markets with a 20 percent advance as Prime Minister Sharif’s resounding July Muslim League party victory was followed by quick renewal of a 3-year IMF program up to $6 billion, which could unlock additional bilateral and multilateral support at that same sum to counter the “critical” net negative international reserve position. GDP growth has been “substandard” at 3 percent the past five years, with half the population in poverty and severe power and security difficulties, according to the Fund. Private investment is only 10 percent of GDP with minimal FDI given poor business climate and governance rankings. Inflation has improved to 5 percent but money supply is up triple that amount due to central bank fiscal deficit financing. The current account gap is only 1 percent of output but external debt service and continued currency intervention leave just enough foreign exchange for a month’s imports. The low 10 percent tax revenue ratio, with barely 1 percent of citizens filing returns, along with higher energy subsidies and provincial transfers have swelled the budget gap to 8 percent of GDP. Electricity outages average 8 hours daily and “circular” debt arrears involving state companies were partially cleared as the new administration took office. Bank assets are 40 percent in government paper and NPLs are 15 percent of the portfolio despite good capital adequacy. Armed threats include the war in next-door Afghanistan, sectarian fighting in Baluchistan and street crime in Karachi, and the balance of payments is further at risk from remittance reductions in Europe and the Gulf. With assistance and reform the economy should grow 5 percent next year as the public debt is set on a medium-term 60 percent of output , sustainability path. The central bank with “inadequate” independence has been pressured to cut rates and legislation should establish a separate monetary policy committee. Bankruptcy and deposit insurance provisions are also needed and inspectors must coordinate with securities counterparts on consolidated oversight, the Fund staff believes.

Corporate bond and sharia-compliant products are underdeveloped and government debt could be listed on the stock exchange for better liquidity. Such practical steps may avoid the fate of the previous 2008 arrangement, which failed on overreach and lack of immediate momentum, according to an internal review. The changes should allow for additional social spending to cover school and health costs, as the commercial framework is overhauled by one-stop foreign investment facilitation and privatization of loss-making state firms. Gulf countries and the Asian Development Bank are on board with early direction and Chinese backers continue to express interest in hydroelectric projects. They recently hailed prospects in nearby Sri Lanka, which has avoided a Fund return and been criticized by the UN for civil war human rights abuses. Growth and the trade deficit have held steady on a “B” sovereign rating as banks plan to float bonds abroad to spice domestic market liberalization.