Pakistan's voters have sent cricket legend Imran Khan in to bat as their new prime minister. But the leader of the Pakistan Tehreek-E-Insaf (PTI) will need more than his skills as an all-rounder to negotiate a tricky economic situation.
International investors have reason to be optimistic: Khan was tipped to win narrowly but achieved a clear victory over his nearest rivals, which promises to give him the authority needed to restore the country's economic health.
Avoiding a political impasse was critical, Hamad Aslam, director and head of research and business development at Elixir Securities, also in Karachi, said in a note on Thursday: “A hung parliament would not have been able to take decisive/tough decisions to steer the economy in the right direction.”
What's more, Khan has shown a willingness to build a strong relationship with China, which has emerged as a key investor in the country through its Belt and Road Initiative.
In its election manifesto, the PTI outlined an ambitious economic agenda to cut the cost of building resources to promote the construction of five million homes over the next five yearsand funnel financing to selected sectors to bolster Pakistan's faltering economy.
But these promises may be hard to keep due to the hostile batting conditions.
Among the bouncers and googlies facing the new government is the enormous trade deficit, an $11 billion external financing gap for the current fiscal year, a currency in freefall, a comparatively low tax-to-GDP ratio, and high interest rates that make borrowing prohibitively expensive.
According to the IMF, Pakistan will need $27 billion in 2018-2019 in total external funding. A more conservative estimate from the country's MInistry of Finance is $23 billion.
The bulk of that -- $15 and $16 billion, based on previous years' data -- should come from foreign direct investment, government bond sales, loans from multilateral banks and commercial borrowing. But that still leaves a shortfall $7 billion to $8 billion, or even $11 billion to $12 billion, depending on which funding estimate is taken.
Seeking the extra padded protection of IMF help is not out of the question, according to Asad Umar, the man tipped to lead Pakistan’s finance ministry. Pakistan has received 12 bailouts from the IMF since 1987, with the last loan programme ending just two years ago.
But an IMF loan will invariably carry conditions, including restrictions on how the proceeds are used and the privatisation of state-owned enterprises, which may prove unpopular politically.
And herein lies the rub of the problem facing Khan: does he dig in to help Team Pakistan slowly build a credible innings, or does he look to please the crowd by smashing a few balls to the boundary?
In it’s election manifesto the PTI pledged to increase social spending and reduce taxes – as part of broader tax reform plans – and to lower energy costs.
Such populist promises are almost directly opposed to fiscal and monetary tightening that the IMF might demand in return for its loan, which could cause social unrest in a country known for its violent protests.
So if Capt. Khan is to make the right call and find the right balance, it could come down to the batting form of the Chinese friends partnering him at the other end of the wicket.
China has already pumped in some $20 biilion into the China Pakistan Economic Corridor (CPEC), which has helped blow out the Pakistan import bill due to the cost of importing Chinese-made machinery and the rising oil price.
There is no doubt Pakistan needs the infrastructure, but the long-term nature of such massive projects will put the current account under severe pressure in the next few years, warned the IMF in a note in March.
For now, the new government has little choice but continue working with its Chinese neighbours, and negotiate any new projects with a more cost-conscious mindset.
And for investors, that may mean more of the same.
According to a note from Asian Frontier Capital, a Hong Kong based frontier market equity investor, the economic woes have already been priced into the stock market, following a 31% drop in value this year.
And by not having a hung parliament, their is casue for optimism.
CAUSE FOR OPTIMISM
With just over 200 million people, Pakistan is currently the fifth-most populous country in the world, strategically located between the two most populous countries on earth -- India and China. Its location was critical in the decision to create the China Pakistan Economic Corridor (CPEC), connecting western China with a deep-sea port at Gwadar in Pakistan.
The CPEC is a $60 billion Chinese investment in Pakistan, which has helped to push up the annual economic growth rate to 5.2%, according to the World Bank, up from 4.5% in 2015.
As a flagship project of China’s Belt and Road Initiative, the CPEC is becoming integral to the revitalisation of the Pakistan economy.
Khan has previously affirmed that the country's friendship with China will continue under his government.
Indeed, five days before Wednesday's elections, Khan announced the creation of a dedicated Pakistan-China Cooperation Unit within the PTI party, to “enhance Pakistan-China strategic cooperative partnership especially in the domains of economy, trade and technology”, according to the official website of the PTI.
To be sure, the reliance on the CPEC is worrying to investors in the short term. In the long term, however, analysts at Spectrum Securities in Karachi see it differently.
“Overall, the situation is that CPEC will benefit Pakistan in the long run for inter-land transportation, but we won’t be able to reap its benefit any time soon,” they said in a note on Thursday.
FORGING AHEAD
The new government will be sworn into office on August 14, with the help of smaller parties and independent candidates, according to reports in the local press.
Addressing the economic woes whilst keeping the social benefit promises made during the election run-up will require a delicate balancing act.
Winning the election with a strong majority and staving off the threat of an indecisive hung-parliament may well be Khan’s greatest achievement to date.
But keeping the support of the notoriously influential military, rooting out corruption and the disruptive nature of Pakistan politics will all test Khan's capacity to stay at the crease and bang out a famous innings.
If he manages all that, and follows through on his election promises in the face of a brewing crisis and drag the country’s economy back on track, he truly will be a hero of the Pakistan people.
