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1 1 (October 9, 2018)

handle is hein.crs/govywr0001 and id is 1 raw text is: Congressional Research Servke Informing the legislative debate since 1914 October 9, 2018 Pakistan's Economic Crisis Background Despite decades of International Monetary Fund (IMF)- supported reforms, Pakistan remains a poor country afflicted by food, water, and energy shortages. These problems, at times severe enough to curtail business operations and stunt agricultural yields, cause considerable economic anxiety and weigh heavily on leaders. Corruption is another major obstacle to Pakistan's economic development, harming both domestic and foreign investment rates and public confidence, as well as eliciting skepticism among international aid donors. Since 2001, the stated policy of the United States has been to assist in the creation of a more stable, democratic, and prosperous Pakistan that is actively combating religious militancy. Pakistan plays a central role in the Trump Administration's strategy in South Asia to stabilize neighboring Afghanistan, amid concerns that its territory continues to harbor numerous U.S.-designated terrorist groups. Elections to seat Pakistan's 15th National Assembly (and four provincial assemblies) took place as scheduled in July 2018, successfully marking the country's second-ever and consecutive democratic transfer of power. In August, new Prime Minister Imran Khan was sworn into office, bringing an end to the decades-long domination of Pakistan's political stage by two dynastic parties. In the lead-up to the 2018 elections, it was correctly expected that the new government would face significant economic challenges, most immediately a currency crisis that has grown out of persistent budget shortfalls and loans for major infrastructure projects. In late September 2018, IMF officials visited Pakistan and discussed the possibility of a new lending program, building upon several IMF loans over the past two decades. The role of China, however, as a major creditor and the centrality of Pakistan to China's Belt and Road Initiative (BRI) complicates the U.S. and international options for responding to an impending crisis and raises economic and foreign policy issues for Congress. Current Economic Crisis The principal causes of Pakistan's crisis are deep-rooted and structural-namely, Pakistan's weak export base and an imbalance between public spending and income. Exports are a much smaller share of the Pakistani economy than other countries of relative economic standing-8% of GDP in 2017, compared to 20% in Turkey and 52% in Thailand. As Figure 1 illustrates, the IMF forecasts faster growth for imports than exports through at least 2023. In recent years, security concerns and energy supply problems have prevented Pakistan from diversifying its export base from low-value added products such as cotton, rice, and leather, to higher-value products and, more crucially, services. Figure I. Pakistan's Trade in Goods and Services $60 $40 $- Source: IMF. Notes: Millions of U.S. dollars; *= forecasts. Pakistan's economic growth has been relatively robust since 2012, reaching 5.7% in 2017. However, growth rates are below that needed to keep pace with Pakistan's rapid population growth and import needs. The IMF projects Pakistan's growing current account deficit and rising debt service will cause its external financing needs to increase sharply in the years ahead. Gross external financing needs are expected to rise from $21.5 billion (7.1% of GDP) in FY2016/FY2017 to around $45 billion by FY2022/FY2023 (9.9% of GDP). According to data from the State Bank of Pakistan, the current account deficit (imports of goods and services minus exports of goods and services) for FY2017/FY2018 (ending in June) reached $18 billion, up nearly 50% from $12.6 billion in the previous year. The current account deficit puts substantial pressure on Pakistan's foreign exchange reserves and the value of the Pakistani rupee, which declined over 11% against the dollar during 2018. This pending crisis may make Prime Minister Khan's vows to create a Muslim welfare state with new public services and job creation difficult to realize. It may also have negative implications for China's vast BRI, within which the China-Pakistan Economic Corridor (CPEC) is the flagship initiative. CPEC is a planned connectivity effort, valued at an estimated $62 billion, that includes major new road, rail, and energy projects for Pakistan. Dwindling Exchange Reserves Over the past two years, Pakistan's foreign exchange reserves have dropped by more than half, from a high of $24 billion in October 2016 to just over $10 billion in August 2018 (Figure 2). At the same time, its external liabilities remain formidable. These include repayments (through 2026) on Pakistan's 2013 IMF loan and various foreign exchange forward and swap arrangements. For example, in May 2018, Pakistan agreed to a $3.1 billion reserve currency swap arrangement with the Peoples Bank https:/crsreports.congress go 0

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