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Imran Khan’s First Test: Pakistan’s Troubled Economy

The economic mess awaiting Pakistan’s new leader could take the thrill out of his election victory.
The country’s current account deficit, a broad measure of the imbalance between imports and exports, has soared to an alarming $18 billion. Foreign currency reserves would cover less than two months of imports.
The Pakistani rupee is shaky, tax collection is scandalously low (last year, in a country of 200 million, fewer than a million people paid any taxes) and Pakistan was recently returned to an international “gray list” for failing to curb terrorism financing, making foreign transactions more complicated and expensive.
So what’s a new prime minister to do?
Imran Khan, the former cricket player whose political party won Pakistan’s disputed election late last month, vowed to tackle the distressed economy the moment he ascends to the premiership, which is expected to happen in the coming days.
But the task will be made more difficult because Pakistan has sandwiched itself between two financial powers: China, from which it has borrowed heavily, and the Western-dominated International Monetary Fund, which might be its short-term savior.
Pakistan has taken out billions in Chinese loans and run up a huge import tab bringing in bulldozers, train carriages and building materials as part of a Chinese-funded master plan to revamp its ports, roads and railways.
That $62 billion plan, known as the China-Pakistan Economic Corridor, has been celebrated by both countries as a long-term investment that will increase trade. It is a cornerstone of a global infrastructure initiative that China calls Belt and Road.
Economists agree that for Pakistan’s economy to develop beyond rice and textiles, its main exports, it needs new infrastructure — a lot of it.
But in the meantime, the Chinese plan is pushing Pakistan’s deficits to unsustainable levels. The country’s debt is rising rapidly and it is running out of hard currency to pay its bills. Pakistani economists say that Mr. Khan’s team will have no choice but to beg the monetary fund for a multibillion-dollar bailout, one of more than a dozen that Pakistan has received since the late 1980s.
That prospect doesn’t make the United States super happy.
“Make no mistake,” Secretary of State Mike Pompeo said this week. “We will be watching what the I.M.F. does.”
Mr. Pompeo objected to the idea of money from the fund being used by Pakistan to pay back Chinese loans.
“There’s no rationale for I.M.F. tax dollars — and associated with that American dollars that are part of the I.M.F. funding — for those to go to bail out Chinese bondholders or China itself,” he said.
Pakistan’s economy, it seems, has become yet another battlefield between the United States and China.
As the largest contributor to the fund, the United States has considerable sway over its decisions. And though the United States and Pakistan enjoyed close ties during the Cold War, the relationship has soured. President Trump froze aid to Pakistan at the beginning of the year, citing frustration with its tolerance of extremist groups that operate within its borders.
Economists say that if the United States tried to block a potential bailout, Mr. Khan’s fledging government could face a major crisis. It is unclear what the United States’ actual position is, and the fund would probably restrict Pakistan from redirecting bailout money to China. Several analysts said that Mr. Pompeo’s remarks were more an expression of frustration than a definitive statement.
Despite its troubles, last year the Pakistani economy grew at more than 5 percent, faster than most Western economies.
But things could change quickly if Mr. Khan’s government doesn’t get a rescue package soon, experts said. Among the concerns are soaring inflation, bank runs, capital flight and new import controls that would make it more difficult to buy items like computers and spare auto parts.
“The situation is certainly not good,” said Mohammed Sohail, chief executive of Topline Management, a brokerage firm based in Karachi, the country’s economic capital. “We could see growth tumbling, interest rates increasing, inflation.”
The trick for Mr. Khan will be managing expectations. He is a Pakistani success story: a legendary athlete who is good-looking, wealthy and connected to the global elite (he once played matchmaker for Princess Diana). His election could open new doors for Pakistan.
But how he handles the cold, hard numbers of Pakistan’s up-and-down economy, more than anything else, will determine his success.
Pakistan’s financial markets seem to like him. As soon as it was clear that Mr. Khan’s party was winning the July 25 election, the rupee gained value and Pakistani stocks surged. Mr. Pompeo’s remarks had the opposite effect on both.
This past week, Mr. Khan has continued his quest to win over enough independent lawmakers and those from smaller parties to form a coalition government.
The election was seen as heavily influenced by military and intelligence officials, who analysts say favored Mr. Khan and sidelined his competition. But his supporters see him as a figure of hope, having defeated two of the country’s powerful political dynasties based partly on his promises of a less corrupt and more equitable society. In his victory speech, Mr. Khan said he wanted to turn Pakistan into an Islamic welfare state.
That is going to be hard to deliver if Pakistan goes hat in hand to the monetary fund, as many expect. Considered the lender of last resort, it can be a stern taskmaster.
In return for lending Pakistan upward of $10 billion, the fund would most likely require more fiscal discipline. That could mean Pakistan would have to reduce public spending and increase the amount of taxes it collects. Both could be a drag on growth and are not exactly the moves a populist prime minister would like to make during his first days in office.
Pakistani economists say Mr. Khan faces a tightrope in trying to reconcile the fund’s demands with the goals of China’s infrastructure plans.
“These are our two masters,” said Turab Hussain, an economics professor at the Lahore University of Management Sciences. “How do you serve both?”
Though China is a member of the monetary fund and one of its biggest contributors, it has a different philosophy when making its own loans. Getting paid back is not its only, or maybe even primary, goal.
As it seeks new markets for its construction companies and new pathways to ship its goods, China is financing ambitious infrastructure projects across Central and South Asia. Beijing also views these projects as a way to project its power and secure allies.
The goal of the monetary fund, by contrast, is to stabilize distressed economies and help countries avoid unsustainable financial imbalances. It structures loans with strict conditions to increase the chances the country will clean up its finances and be able to pay back its loans.
While Chinese loans don’t have the same strings attached, they still have strings. In Pakistan, much of the profit from new power plants and roads goes straight back to Chinese companies.
And as China showed in Sri Lanka, it can be a hard-knuckled debt collector. When Sri Lanka couldn’t pay back the money it had borrowed, China snatched one of its biggest ports.
“Pakistan is clearly falling to the China side,” said Sian Fenner, lead Asia economist for Oxford Economics, a global research firm.
Even with a bailout from the monetary fund, she added, “I don’t see that changing.”

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