Pakistan’s Economic Crisis

Pakistan’s Economic Crisis

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October 9, 2018
Pakistan’s Economic Crisis
Background
Figure 1. Pakistan’s Trade in Goods and Services
Despite decades of International Monetary Fund (IMF)-
supported reforms, Pakistan remains a poor country
afflicted by food, water, and energy shortages. These
problems, at times severe enough to curtail business
operations and stunt agricultural yields, cause considerable
economic anxiety and weigh heavily on leaders. Corruption
is another major obstacle to Pakistan’s economic
development, harming both domestic and foreign
investment rates and public confidence, as well as eliciting
skepticism among international aid donors. Since 2001, the
stated policy of the United States has been to assist in the
creation of a more stable, democratic, and prosperous

Pakistan that is actively combating religious militancy.
Source: IMF.
Pakistan plays a central role in the Trump Administration’s
Notes: Millions of U.S. dollars; * = forecasts.
strategy in South Asia to stabilize neighboring Afghanistan,
amid concerns that its territory continues to harbor
Pakistan’s economic growth has been relatively robust
numerous U.S.-designated terrorist groups.
since 2012, reaching 5.7% in 2017. However, growth rates
are below that needed to keep pace with Pakistan’s rapid
Elections to seat Pakistan’s 15th National Assembly (and
population growth and import needs. The IMF projects
four provincial assemblies) took place as scheduled in July
Pakistan’s growing current account deficit and rising debt
2018, successfully marking the country’s second-ever and
service will cause its external financing needs to increase
consecutive democratic transfer of power. In August, new
sharply in the years ahead. Gross external financing needs
Prime Minister Imran Khan was sworn into office, bringing
are expected to rise from $21.5 billion (7.1% of GDP) in
an end to the decades-long domination of Pakistan’s
FY2016/FY2017 to around $45 billion by FY2022/FY2023
political stage by two dynastic parties. In the lead-up to the
(9.9% of GDP).
2018 elections, it was correctly expected that the new
government would face significant economic challenges,
According to data from the State Bank of Pakistan, the
most immediately a currency crisis that has grown out of
current account deficit (imports of goods and services
persistent budget shortfalls and loans for major
minus exports of goods and services) for FY2017/FY2018
infrastructure projects. In late September 2018, IMF
(ending in June) reached $18 billion, up nearly 50% from
officials visited Pakistan and discussed the possibility of a
$12.6 billion in the previous year. The current account
new lending program, building upon several IMF loans
deficit puts substantial pressure on Pakistan’s foreign
over the past two decades. The role of China, however, as a
exchange reserves and the value of the Pakistani rupee,
major creditor and the centrality of Pakistan to China’s Belt
which declined over 11% against the dollar during 2018.
and Road Initiative (BRI) complicates the U.S. and
This pending crisis may make Prime Minister Khan’s vows
international options for responding to an impending crisis
to create a “Muslim welfare state” with new public services
and raises economic and foreign policy issues for Congress.
and job creation difficult to realize. It may also have
negative implications for China’s vast BRI, within which
Current Economic Crisis
the China-Pakistan Economic Corridor (CPEC) is the
The principal causes of Pakistan’s crisis are deep-rooted
flagship initiative. CPEC is a planned connectivity effort,
and structural—namely, Pakistan’s weak export base and an
valued at an estimated $62 billion, that includes major new
imbalance between public spending and income. Exports
road, rail, and energy projects for Pakistan.
are a much smaller share of the Pakistani economy than
other countries of relative economic standing—8% of GDP
Dwindling Exchange Reserves
in 2017, compared to 20% in Turkey and 52% in Thailand.
Over the past two years, Pakistan’s foreign exchange
As Figure 1 illustrates, the IMF forecasts faster growth for
reserves have dropped by more than half, from a high of
imports than exports through at least 2023. In recent years,
$24 billion in October 2016 to just over $10 billion in
security concerns and energy supply problems have
August 2018 (Figure 2). At the same time, its external
prevented Pakistan from diversifying its export base from
liabilities remain formidable. These include repayments
low-value added products such as cotton, rice, and leather,
(through 2026) on Pakistan’s 2013 IMF loan and various
to higher-value products and, more crucially, services.
foreign exchange forward and swap arrangements. For
example, in May 2018, Pakistan agreed to a $3.1 billion
reserve currency swap arrangement with the Peoples Bank
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Pakistan’s Economic Crisis
of China, increasing its access to China’s RMB, a more
deep-water port at Gwadar on the Arabian Sea. The new
stable and convertible reserve currency.
Pakistani government appears likely to scrutinize CPEC
projects more vigorously than its predecessor, especially
Figure 2. Pakistan’s Foreign Exchange Reserves
given a singular focus on corruption amidst ongoing
(U.S. $ Billions)
concerns about the pace and quality of Chinese investments
to date. Khan and his party seek to move Pakistan away
from the high-visibility, high-cost Chinese-financed
infrastructure projects championed by the previous
government; rather, they would prefer to redirect public
spending toward the provision of basic services.
The Pakistani foreign minister hosted his Chinese
counterpart in September, vowing to preserve CPEC as a
top priority of his government. At the same time, other
Pakistani officials have promised to review and renegotiate
some CPEC-related agreements. A subsequent Pakistan-
China meeting resulted in agreement to expand CPEC
Source: State Bank of Pakistan, IMF, Standard Chartered.
activities into the social sector, with proposed initiatives on
Note: SPB = State Bank of Pakistan.
potable water, health, and education. If pursued, these
would better align CPEC with the Pakistan government’s
U.S. Policy
emphasis on human welfare. In an effort to move ahead on
unrealized plans to establish several special economic zones
While the U.S. government supported past IMF programs
(SEZs) in Pakistan, negotiators also agreed to welcome
for Pakistan, some Members of Congress and the
“third-country investors.” Press reports suggest Pakistani
Administration have recently argued that the United States
officials are also pressing Chinese counterparts to establish
should not support IMF loans to countries, such as Pakistan,
new factories and pursue poverty-alleviation initiatives. A
whose debt-burden has increased because of “predatory”
new nine-member Pakistani committee on CPEC, chaired
lending by China. Pakistani officials have responded by
by the planning minister, appears to seek more private-
asserting that it does not intend to use any funds from a
sector Chinese investment that would employ more
possible IMF program to repay China but rather to finance
Pakistani suppliers and labor. It is not clear how this
much-needed imports. Further, Pakistani officials blame
“realignment” of CPEC goals will be paid for. To date, no
high oil-prices, rather than its China-related investments,
Chinese manufacturing has relocated to Pakistan and none
for its current economic woes. While borrowing from China
of the nine envisioned SEZs has been established (with only
temporarily supported the Pakistani balance of payments
four such zones now planned). Meanwhile, the city of
and prevented an immediate crisis—and Islamabad may
Gwadar reportedly has seen little or no new industry,
also consider multibillion-dollar loans from the Saudi-based
chronic water and electricity shortages continue,
Islamic Development Bank—experts consider it unlikely
construction on a planned airport and power plant has yet to
that Pakistan will be able to return to capital markets
begin, and virtually no commercial shipping uses the port.
without a robust and stringent IMF program.
Issues for Congress
The Trump Administration has taken note of Pakistan’s
Questions that Members may consider include the
growing debt to China and expressed opposition to any
following:
international bailout that would provide funding to reduce
such debt. Just days after Pakistan’s July national elections,
 To what extent is Chinese lending to Pakistan a cause,
Secretary of State Mike Pompeo said, “There’s no rationale
or contributing factor, of Pakistan’s ongoing economic
for IMF tax dollars … to go to bail out Chinese bond
holders or China itself.”
crisis?
In August, 18 U.S. Senators signed
a letter to the Administration expressing concerns about
 If the IMF lends to Pakistan, what economic reforms are
“predatory Chinese infrastructure financing.” However,
most essential?
during a September visit to Islamabad, Pompeo reportedly
 How can the United States help Pakistan boost its
assured his interlocutors that the United States would not
exports?
seek to block any potential new IMF package. A staff team
from the IMF visited Islamabad in September and October,
 What are the economic and policy implications of
2018. According to their official statement, “[R]ecent
China’s apparent growing influence in the region?
policy measures are steps in the right direction, but not yet
 What are the potential implications of diminished U.S.
sufficient. Decisive policy action and significant external
influence over Pakistan if it seeks bilateral financing
financing will be needed to stabilize the economy.” At the
instead of support from the IMF, where the United
same time, the IMF is working with China to improve the
States is the largest shareholder?
transparency of its foreign loans and investments.
K. Alan Kronstadt, Specialist in South Asian Affairs
A CPEC Reset?
Martin A. Weiss, Specialist in International Trade and
Featured CPEC projects include construction within all
main sectors of Pakistan’s transportation infrastructure,
Finance
boosting energy capacity and distribution, and developing a
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Pakistan’s Economic Crisis

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