Supporters of opposition leader Imran Khan's PTI political party attend a celebration rally in Islamabad on July 30, 2017, after the Pakistani Supreme Court disqualified prime minister Nawaz Sharif. Photo: Reuters / Faisal Mahmood

Pakistani shares continued to languish at the bottom of the Asian pack, with a loss of more than 10% through August, as a typical pattern of post-upgrade retrenchment after rejoining the core MSCI Index combined with extended bouts of political, geopolitical and balance-of-payments instability resurrecting concern after completion of the country’s first-ever IMF loan program last year.

Two recent graduates from the frontier to main gauges, Qatar and the United Arab Emirates, telegraphed the correction path after large run-ups in advance as they suffered their own diplomatic and fiscal setbacks, but Pakistan’s were more pronounced in view of its lower per capita income and developing-country status.

Nawaz Sharif, a nominal economic reformer, was forced to resign as prime minister ahead of 2018 elections after a military-influenced court investigation of corruption charges, although his party, now led by his brother, continues with a parliamentary majority.

The opposition Pakistan Tehreek-e-Insaf (PTI), headed by former cricket champion Imran Khan, has criticized the Sharif family’s dubious wealth accumulation but has not yet offered a convincing program to sway the establishment business and financial communities, which increasingly look to Asian alongside traditional Western partnerships again eroded by US President Trump’s rhetorical hard line in his new Afghanistan strategy.

With these elements unfolding, the Pakistani rupee dropped to a record 105 low against the US dollar, as the central bank and Finance Ministry accused each other of mismanagement, underscoring lingering policy and performance doubts highlighted by the International Monetary Fund’s July Article IV report.

The new prime minister, Shahid Khaqan Abbasi, denied formal devaluation but will reduce “unnecessary” imports to cushion international reserves, down one-quarter to US$14 billion from last October’s peak.

The IMF’s retrospective of the 2013-16 loan-program arrangement praised macroeconomic and reform steps, but pointed out fresh risks alongside “long-standing” fiscal and current-account deficits, public domestic and external debt, and challenges facing the financial and power sectors, amid poverty and unemployment.

Growth in gross domestic product this fiscal year will be above 5% thanks largely to ongoing construction of infrastructure for the China-Pakistan Economic Corridor, while remittances from the Persian Gulf in particular are “sluggish”, the IMF says.

With higher food costs from lagging agricultural production, headline inflation is also heading toward 5%, and the State Bank of Pakistan may have to shift its monetary stance from accommodation to tightening, especially with additional exchange-rate pressure.

The fiscal position remains precarious, with the gap running above target at 4% of GDP on flagging tax collection amid widespread evasion, which was a chief priority under the IMF facility.

The trade deficit was a record $40 billion for the year ending in June, as the central bank’s foreign-exchange derivative obligations nearly doubled to $3.5 billion. Bank private credit is up almost 15% annually, but gross bad loans are 10% of the total, as small banks are undercapitalized and deposit insurance is just about to launch.

State power-company arrears built up again to the equivalent of 1% of GDP in the first half of the fiscal year, as the stock-exchange privatization of distributors, designed to improve governance and payment, remains delayed. With the chronic energy crunch, natural-gas supplies also languish with 10% losses, above international standards according to experts.

Pakistan was among the top 10 gainers in the World Bank’s “Doing Business” ranking, as it rose four spots to 144 out of 190 countries with record automation and a new secured-transactions law. However, the IMF’s July evaluation urged overdue changes affecting the labor market, a one-stop investment shop, property registration, and commercial arbitration. It also noted a continued poor score at 116 on the companion Transparency International list, with corruption, money laundering and hidden assets found to be common practices.

Financial inclusion also lagged on low-income female and rural populations, in particular, as a strategy to widen conventional and Islamic banking access through the end of the decade is at an early stage.

External debt was almost $60 billion at the end of March, with $40 billion in bilateral and multilateral loans as sovereign borrowing is increasingly on commercial terms through Eurobonds and China’s Belt and Road Initiative.

Finance Minister Ishaq Dar ruled out an IMF return urged by chambers of commerce as another global bond issue worth $500 million to $1 billion is under preparation for the coming months. However, credit-default-swap spreads have recently risen 100 basis points, signaling a likely ratings downgrade and yield premium that could indefinitely scuttle both IMF and MSCI index graduation ambitions.

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Gary Kleiman

Pioneer and recognized expert in the field of global emerging economies and financial markets. Founder of first consulting firm dedicated to providing independent analysis and advice to public and private sector clients in 1987, and research coverage and firsthand experience covers 75 countries in all developing regions. Advisor on financial vulnerability issues, risk management, portfolio allocation, and financial sector and capital markets strategy and development.