Foreign-exchange reserves have slumped this year on the back of a widening current-account deficit, prompting the central bank to devalue the currency four times since December and hike interest rates. Moody’s Investors Service downgraded the nation’s outlook to negative last month, citing the nation’s worsening finances.
Umar said his Movement for Justice party hasn’t yet spoken to any potential lenders. “No formal work can be started until the government is formed,” he said.
If Pakistan asks the IMF for support, it won’t be the first time. The nation has gone through decades of debt blowouts and balance-of-payment imbalances and 12 IMF programs since the late 1980s. The amount of Chinese loans given to Pakistan over the last 13 months alone comes close to the IMF’s last bailout of $6.6 billion.
Those vast debts to Beijing have prompted worries from U.S. Secretary of State Mike Pompeo, who said this week he would be watching to see if Khan’s new government uses IMF funds to pay off the opaque Chinese loans. Umar said he would bring more transparency to the more than $60 billion Belt and Road infrastructure projects in Pakistan
“One friendly advice to the Americans, we’ll worry about our Chinese debt, but I think they better handle their own Chinese debt first,” he said. “We have a serious external debt problem, I’m not saying we don’t,” though “we don’t have a Chinese debt problem.”
With Pakistan’s finances under stress Khan may struggle to implement his plans to create an “Islamic welfare state.” The 65-year-old leader has been coy how he will fund his expansionist plans, though he said in an interview last month that loans would be needed in the short term.
Reiterating comments made by Khan to Bloomberg last month, Umar said his party won’t attempt to privatize Pakistan’s bloated and loss-making state companies such as Pakistan International
Airlines Corp. and Pakistan Steel Mills.
Umar said within the first 100 days of the new administration the state-owned firms will be shifted into a wealth fund similar to Singapore’s Temasek Holdings Pvt. to remove them from political interference. The government will also have to take over some, if not all, of the national airline’s 367 billion rupee debt ($2.1 billion) to start the carrier’s turnaround, he said.
Pakistan’s current economic turmoil is a sharp contrast to the generally rosy picture more than a year ago when growth was reaching its highest level in a decade, aided in part by low oil prices, the completion of the last IMF program in September 2016 and China’s infrastructure financing.
But that growth boom came with rising imports of Chinese machinery and other goods, widening Pakistan’s current-account deficit by 42 percent to $18 billion in the year through June. Surging oil prices are making matters worse, with the central bank recently warning that “the balance of payments has further deteriorated” because of rising crude and investor inflows remaining limited.
“Whatever has to be done, has to be done in the next few weeks,” said Umar. “It should have been done six months back.”
Here are some other key comments Umar made in the interview:
On the currency: “Currency alignment should be decided by the state bank based on economic fundamentals, not by finance ministry based on political considerations. I don’t think the IMF wants free-float for Pakistan, it’s such a thin market.’’
On taxes: To make businesses more competitive with regional countries, the new government plans to decrease taxes on energy supply factories and agriculture. It will cover up the lost revenue by introducing a wealth tax