Imran Khan’s inaugural address to the nation as prime minister — delivered on August 19 — was almost exclusively focused on the country’s socio-economic predicament. There was little discussion of foreign affairs, terrorism, and large-scale infrastructure projects. Instead, Khan focused on the country’s fiscal health, environment, and human development. The prime minister bemoaned the high rates of stunting, infant mortality, and illiteracy, as well as the growing national debt.

The policy debate, however, has been overtaken by efforts to crowdfund the $12 billion-plus Diamer-Bhasha and Mohmand dam projects — an initiative led by the chief justice of Pakistan and supported by the army. Khan backed the effort in his second national address on September 7. As of September 11, the fund has raised roughly $24 million. The dam initiative could distort policy priorities and public spending.

The government will issue a downward revision of its growth forecast, from 6.2 percent to 5.5 percent, according to The News. It’s higher than estimates from the major international finance institutions (IMF: 4.7 percent; World Bank: 5.0 percent; ADB: 5.1 percent).

Pakistan’s fiscal health remains precarious. As of August 31, net foreign exchange reserves stood at $9.624 billion, dropping by over seven percent since the beginning of August. The current account deficit stood at$6.2 billion in the first two months of the FY 2018-2019 financial year (July and August), 1.3 percent lower than the same period last year.

In July and August, exports grew by 5.1 percent and remittances were up by 13.45 percent, when compared to the same period last year. Import growth may be leveling off, rising by 1%, driven by rising energy costs and growing volume. Energy makes up a growing share of imports (over 30 percent in July 2018), while machinery imports are in decline. The Express Tribune reports that the import of LNG grew by 144 percent to $332 million in July 2018 compared to $136.2 million in the same month last year.

Net foreign private investment, both in direct and portfolio investment, continues to decline as foreign investors retreat from emerging markets.

Moody’s forecasts a current account deficit of 4.8% of GDP this year. It assesses that Pakistan’s ability to repay external debt is presently adequate but will weaken.

The new government remains conflicted about an IMF bailout. Finance Minister Asad Umar describes the Fund as a “fall-back option” after “exploring our preferred options.”

It will use a mixture of tools to avoid or reduce the size of an IMF bailout. These measures include slashing the budget, raising duties on non-essential imports, devaluing the rupee to boost exports, issuing diaspora bonds, and lending from friendly countries.

Umar told the Senate in late August that Pakistan needs $9 billion to run the country. Importantly, he also noted that the decision to go to the IMF will be proposed before parliament for discussion.

A large infusion of funds from Saudi Arabia has been rumored.

An amended budget for the current fiscal year could cut development spending by more than fifty percent — almost $4.8 billion. Income and consumption taxes will likely be raised. Finance Minister Asad Umar has also said that the tax net can be expanded from 1 million to 3 million filers.

The government remains conflicted about energy subsidies. A decision to raise consumer natural gas prices by an average of 46 percent — which have remained unchanged for five years — was rescinded. Electric power distribution companies have requested a half a cent increase in consumer rates.

The privatization of large state-owned enterprises is unlikely in the near future. Islamabad will likely focus on its reform, which will be blunted by political considerations.

The new railways minister, Sheikh Rashid Ahmed — who also served as minister of railways during the Musharraf era — pledged to eliminate the company’s PKR 37 billion ($300 million) deficit by the end of the year, perhaps by making the federal government directly liable for the company’s pensioners. Over 60 percent of the company’s FY 2017-18 budget was allocated for salaries and pensions for 75,000 employees and 1 million pensioners. Rashid has also pledged to add 20,000 employees to overstaffed service and increase subsidized housing for staff.

During the previous government’s five-year tenure, Pakistan Railways revenue grew by 169 percent from PKR 18.078 billion in FY 2012-13 to PKR 48.59 billion in FY 2017-18. But losses grew by 21 percent from PKR 30.5 billion in 2012-13 to PKR 37 billion in 2017-18.

Rashid said that he will “double the number of freight trains,” straighten curved tracks in select areas (to reduce travel time), lease railway land to private investors, and cut unnecessary spending. At the same time, he’s recommended that a standard gauge track be laid. He said, “I know it will cost billions of dollars but once completed it will solve all problems of railways.”

Posted by Arif Rafiq

Arif Rafiq is the editor of CPEC Wire. He is president of Vizier Consulting, LLC, a political risk advisory company, and a non-resident fellow at the Middle East Institute. Rafiq authored the first comprehensive public study on CPEC, "The China-Pakistan Economic Corridor: Barriers and Impact," published by the U.S. Institute of Peace. He can be reached via email at [email protected].

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