Pakistani Prime Minister Nawaz Sharif has had a rough six months. He’s seen street protesters nearly oust him, some of the worst fuel shortages in recent memory and a child massacre that shocked the world.
Beyond the negative headlines, he’s also managed to start turning around the economy. Lower oil prices, higher remittances and increased consumer spending are pushing growth toward a seven-year high. Corporate earnings are soaring, stocks have surged and the currency is among the world’s top performers.
The steady economic upturn as growth prospects weaken in many emerging markets has underpinned Sharif’s political support, with his party gaining in a Senate election held this month. While much more needs to be done to fix an economy dependent on financing from the International Monetary Fund, the perception of Pakistan is starting to change.
“Sharif’s government has improved things with the help of the IMF,” Sayem Ali, head of investments strategy and advisory at Standard Chartered Plc’s Karachi unit, said by phone. “They have put Pakistan back on the radar in terms of international investors.”
When Sharif took power in May 2013, he faced a balance-of-payments crisis that forced him to seek help from the IMF. Foreign exchange reserves have doubled in the past year to $16 billion, the budget deficit has narrowed and inflation is easing as global oil prices fall.
Pakistan last month said it regained its eligibility to borrow from the International Bank for Reconstruction and Development, making it eligible for $2 billion of credit over the next four years. The IMF also is optimistic it will meet the conditions of the $6.6 billion loan it received two years ago.
“I see Pakistan breaking with past precedent of failed IMF programs and half-completed reforms, which set the stage for a crisis,” Jeffrey Franks said last month, when he was IMF mission chief. The country has a “good foundation” for further growth, a delegation led by his successor said on March 9.
The IMF forecasts Pakistan’s economy to expand 4.3 percent this year, compared with the five-year average of 3.6 percent. Pakistan’s moves to bolster its public finances are credit positive, Moody’s Investors Service said in a report on Monday.
“It is striking that reforms have continued despite disruptive domestic political challenges over the last year, and heightened security threats from Islamist terrorism,” Moody’s analysts wrote.
Pakistan’s middle class more than doubled to 84 million in 2002-2011, according to a study by Jawaid Abdul Ghani, a professor at the Karachi School for Business and Leadership. That’s brought almost half the nation into that segment for the first time, boosting profits at Nestle Pakistan Ltd. and Lucky Cement Ltd. to record levels.
Sharif is aiming to raise $2 billion from asset sales in the year ending June 30 to meet conditions attached to the IMF loan. Up for grabs in the next few years are stakes in Habib Bank Ltd., the nation’s biggest lender by assets, and Pakistan International Airlines Corp., the national carrier.
The benchmark KSE100 stock index has rallied 62 percent since Sharif took office, the sixth-best performance among 93 world gauges tracked by Bloomberg. Over the past six months, Pakistan’s rupee has outperformed every major global currency.
“The private sector is coming into play,” said Nadeem Siddiqui, Pakistan head at the International Finance Corp. “But the main problem will not be solved overnight.”
As always with Pakistan, caveats abound. Political protests last year showed that a few thousand protesters camped on the streets could trigger fears of a coup, a common occurrence in a nation where the military still calls most of the shots on foreign policy and internal security.
The slaughter of 134 students in December underscored the ongoing risk from Taliban militants, part of an insurgency that has killed more than 50,000 people since 2001. Sharif has stepped up an offensive into border regions and improved ties with neighboring Afghanistan in a bid to stem the violence.
Sharif canceled a trip to the World Economic Forum in Davos in January as fuel shortages left motorists stranded across the country. Shortly afterward, a terrorist attack triggered a blackout that left 80 percent of the country without power.
Plans to sell state assets have also hit stumbling blocks. The government was forced to scrap a November sale of shares in Oil & Gas Development Co. Ltd., its biggest energy company, due to political unrest and falling oil prices.
Fixing Pakistan’s weaknesses are “a tall order, requiring political will, good governance, patience and capital,” said Hasnain Malik, head of frontier markets strategy at Exotix Partners LLP in Dubai. “The long-term economic benefits are huge, but so are the organizational and political challenges standing in the way.”
Sharif is looking abroad for help. He’s asked the Chinese to help set up coal-based power plants to reduce reliance on imported oil. The nation’s first liquefied natural gas terminal is expected to receive its first shipment this month from Qatar.
One key test will be Sharif’s ability to boost one of the world’s lowest tax collection rates. Government data show that less than 1 million people, or 1 percent of the world’s sixth-largest population, file tax returns.
In the 12 months through June, Sharif’s first full-year in office in this term, Pakistan earned about $9 billion from direct taxes. Of that, the nuclear-armed nation spent more than two thirds on defense. The budget for the fiscal year that begins July 1 will probably be presented in the last week of May or early June, according to a statement from the Finance Ministry on Monday.
“It may seem bizarre that something as mundane as tax collection will be such a critical determinant of Pakistan’s economic future, but it’s absolutely true,” said Michael Kugelman, an analyst at the Woodrow Wilson Center in Washington. “Getting the common people to pay more taxes is politically risky enough, but not nearly as risky as pressuring powerful players in the agricultural industry and the military.”
It remains to be seen if Sharif will take tougher steps to boost the economy. While his Pakistan Muslim League party nearly doubled its seat total in a Senate election this month, the memory of protesters blocking streets in the capital of Islamabad is still fresh.
“Sharif has gained very good ground and should now make long-term decisions,” said Qazi Masood, a professor at the Institute of Business Administration in Karachi. “The next three years are very important. If they are short-sighted, then they will be wiped out.”