September 04 , 2020
Imran Khan’s Moment
Prime Minister Imran Khan, who has been in power for a bit over two years now, is a complex and intriguing figure. He rose to fame leading Pakistan to a World Cup win in cricket in 1992, then delved into philanthropy opening a cancer hospital before starting a political career as the head of the PTI party, whose main platform has been anti-corruption.
In politics he was a marginal figure during the Musharraf years, but his party did surprisingly well in 2013, finishing second to the PML-N led by Nawaz Sharif. When he won the 2018 election, it was the first time since 1989 that civilian politics was not controlled in Pakistan by either the Sharif family or the Bhutto/Zardari clan, who ran the PPP. The PTI won a broad base of support across the breadth of Pakistan, and was not an ethnic party, and it was particularly popular with younger, more-educated voters. Critics on the other hand saw the PTI victory as the outcome of military and judicial manipulations to get rid of Nawaz Sharif, who was alleged to be charting too independent a course from these other power centers in Pakistan; Imran Khan was seen as an acceptable fig leaf for democracy while real power would be with the army. Supporters and detractors of Khan have been arguing the validity of this scenario ever since the 2018 election.
I personally had mixed feelings about Khan. Clearly corruption, along with its handmaiden, incompetent economic policies, had held Pakistan back for the last ten years after Musharraf had given up power. Imbalances were building up, particularly a soaring trade and current account deficit, and essentially no growth in exports in years, all stemming from a manipulated and overvalued currency. But was Khan the right person to fix these challenging problems? His economic skill set was unknown. In addition, Khan, who in his younger days was quite taken with earthly pleasures, had become far more religious, and often would make statements that suggested a supportive stance for a more religious state. This was rather alarming. His verbal support of the Taliban was also concerning, as a policy of more civil war in Afghanistan was wrongheaded in my view.
In power though, he has ignored the religious agenda completely. He has also not pursued a policy of aggressive Taliban support in Afghanistan, though Pakistan continues to provide the Taliban the safe havens it needs to maintain its insurgency at a low level.
What Khan has done is navigate three major challenges very well. The first, and easiest, was the Indian attempt to strike Pakistan after they blamed Pakistan for violence in Kashmir. The Indian airstrike went off badly, and an Indian jet was shot down and its pilot captured. Khan handled the aftermath quite well, Pakistan came out looking good, and the he deescalated the conflict without handing Indian any propaganda points.
The second challenge has been the pandemic. Here too, Khan’s government has performed extremely well. There was great fear that COVID would sweep through the densely populated nations of South Asia wreaking great havoc. But Pakistan’s new case counts peaked in mid-June and have fallen since then to less than 500 per day, with daily deaths in the single digits. India on the other hand is suffering 80,000 new cases daily and about 1,000 deaths. This huge disparity is very puzzling. Both nations instituted lockdowns, though Pakistan eased sooner than India. Both nations have similar levels of public health and medical facilities. So why is Pakistan doing so much better? There are a number of theories ranging from weather to wudu but no clear answer. Regardless, Khan has to be pleased with how well Pakistan has fared, with the economy suffering far less damage than India’s.
The third challenge has been the problem inherited from the PML-N, the catastrophic financial situation. Khan faced the music and made a deal with the IMF in 2019 to undertake a number of critical reforms in exchange for billions in new loans to cover Pakistan’s forex crisis. Three main changes took place. First, the currency was sharply devalued so that it reflected the true value of the rupee. This raised the cost of imports, but finally made Pakistan exports price-competitive. The net result was that Pakistan’s trade balance quickly improved, and exports in rupee terms have soared over the last year while starting to rise in dollar terms. In addition, remittances have remained strong, putting Pakistan’s current account into surplus, and allowing Pakistan to build dollar reserves, which have now reached almost 20 billion dollars.
The second change was making the State Bank of Pakistan truly independent as a central bank. This conforms with best practices in advanced economies. The SBP took this power under its new leadership and dramatically raised interest rates in 2019 to bring inflation under control. This was starting to work by early 2020, but then COVID brought inflation to a halt, and allowed the SBP to sharply cut interest rates. In response, economic activity has started to soar in the last 60 days, with a huge rise in car and cement sales for example.
The third major change is putting control over the exchange rate in the hands of market. The SBP has made it clear that it will allow the exchange rate to float up and down depending on conditions, and will not waste forex reserves propping up an overvalued rupee as prior governments have done, a strategy that always ends badly with an IMF program.
The next three years could be outstanding for Pakistan. If a vaccine becomes available by early 2021, and China has already agreed to supply tens of millions of doses to Pakistan, then the economy is now well-positioned to take advantage of the coming global boom. Pakistan should see exports rise sharply and GDP growth quite strong. Major projects like the Diamer Basha Dam, new motorways, and rail system upgrades should boost infrastructure and trade. An independent central bank should be able to moderate inflation while keeping the rupee cheap enough to support exports and build forex reserves.
A rising middle-class will then back Imran Khan to reelection in 2023. If he can govern effectively, he will gain the political clout and public support that will allow Pakistan’s civilian politicians to supplant the military as the true ultimate power in the country. This process happened exactly this way in the 2000’s in Turkey, as Erdogan’s AKP modernized Turkey and pushed the military aside. I don’t want Imran Khan to turn into an Erdogan-style autocrat bent on holding power for 30 years, but if he can double Pakistan’s GDP in 10 years he will be the most successful civilian leader Pakistan has had, and will be the father of a modern Pakistan.
