Promises to IMF in doubt as protests sap economy

Commerce Minister Khurram Dastagir says more than a year of efforts to fix economy had ‘gone up in smoke’

Anti-government protests that have gripped Islamabad since mid-August could throw off course economic reforms Pakistan promised to deliver in return for an IMF bailout, senior officials said, raising the risk of a sovereign rating downgrade.

The International Monetary Fund (IMF) saved Pakistan from possible default last September by agreeing to lend $6.6 billion over three years, conditional on reforms such as a long-standing pledge to privatise loss-making state companies.

There is no suggestion that the assistance, which is disbursed in tranches, is about to dry up.

“The programme is not in jeopardy at the moment,” said a top economic adviser with direct knowledge of talks with the Fund.

“The IMF folk think that if we can wrap this crisis up in a week or so, things will remain on course and normal. But if it goes on any longer, then, yes, we will be in trouble.”

Commerce Minister Khurram Dastgir Khan voiced concern that an IMF team had already cancelled a visit because of the protests that turned violent last week as Prime Minister Nawaz Sharif refused to resign.

He said more than a year of efforts to fix the economy had “gone up in smoke”.

“The government has very painstakingly been building a house of international confidence, and the foundation of this was the IMF package and abiding by our reforms’ promises,” the minister told Reuters.

“But … our struggles of 14 months have gone up in smoke in a matter of 14 days. We are pushed to a point where we have to go back to the drawing board.”

For now, credit ratings agency Standard & Poor’s is watching events unfold in Islamabad, where followers of Tahirul Qadri and Imran Khan camped out for two weeks before advancing on government buildings.

S&P currently has a B- sovereign rating for Pakistan, which was thrown the IMF lifeline to bring down inflation, reduce its fiscal deficit and tackle a crippling energy crisis. Robert Zhong, Hong Kong-based sovereign analyst at S&P, said structural reform may largely continue despite the political turmoil, but added: “If there are signs these programmes will be dislocated, we could review the rating.”

At Moody’s, Singapore-based sovereign analyst Anushka Shah echoed that view, saying the “political developments would have implications for Pakistan’s creditworthiness if they resulted in a derailment of the structural reform process”.

Investor confidence melts away

Investors have taken fright over the agitation against Sharif, who won a decisive victory in May 2013 elections, the first democratic transition in the country’s history.

Since Imran Khan announced on August 5 that his supporters would besiege the capital, the benchmark 100-share Karachi Stock Exchange index has fallen more than 7 per cent, but recovered some of that on Tuesday, and the rupee has lost 3.4 per cent against the dollar.

Two foreign heads of government have cancelled visits to Pakistan due to the protests, and Sharif himself has called off a trip to Turkey.

The worry now is that they could ruin a visit this month by President Xi Jinping of China.

“These people should realise they have disrupted the journey to progress,” Sharif said at the weekend. “We want to set up many energy plants and electricity projects in Pakistan in partnership with Chinese corporations. That may also be disrupted.”

Commerce Minister Khan said the bidding process for an energy park of 10 coal power plants with a total capacity of 6,600 MW has been postponed because investors are unwilling to commit to the country in the current political climate.

“This is a government that has been trying to improve investor confidence,” he said. “But if the government’s fate itself is under question, then of course this confidence will be affected.”

Meanwhile, development spending in poverty-stricken areas of the country has been throttled by the turmoil because employees of executing agencies are not turning up for work.

According to a senior official at the Planning Commission, Rs 70 billion was earmarked for development spending in July to August, but just 40 per cent of that was spent.

“People are living in abject poverty … without education and health and roads and water, but Imran Khan wants power at the centre,” the official said.

“These protests have totally botched up our priorities.”