Pakistan Prime Minister Says Political Turmoil Denting Economy

(Bloomberg) -- Pakistan's Prime Minister Shahid Khaqan Abbasi said political turmoil is hobbling investor confidence and negatively impacting the country's economy before national polls next year.

While Abbasi said Pakistan's economic growth rate is still set to hit a targeted six percent in the financial year through June, corruption investigations against top members of the ruling party and religious protests in the capital are deterring investors. The government sought to sell as much as $3 billion in dollar bonds this week to bridge its widening current-account deficit and shore up dwindling foreign reserves. They raised $2.5 billion.

“There is uncertainty in the country ever since these affairs have surfaced,” Abbasi said in an interview in Islamabad on Nov. 24, referring to the leaking of files from a Panama law firm last year. That leak brought about the downfall of former Prime Minister Nawaz Sharif in a corruption scandal revolving around his family's purchase of high-end apartments in London.

Taking over after Sharif was ousted in July by the Supreme Court, Abbasi's fledgling administration has been shaken by weeks of right-wing religious protests that brought the capital to a standstill and forced the resignation of the country's law minister.

Adding to Abbasi's challenges, he also took over the finance portfolio after granting Finance Minister Ishaq Dar medical leave in London last week. Dar also faces corruption charges related to the Panama probe and could be arrested if he returns to Pakistan. Both Sharif and Dar have denied any wrong-doing.

“It definitely impacts growth, the economy and investor confidence,” Abbasi said, adding he would continue to be Pakistan's finance minister through the government's current term that ends on June 4.

Pakistan's politics and an increasingly precarious macroeconomic position led to the biggest foreign outflow this year from Pakistan's stocks since the 2008 financial crisis, even as the country was restored to emerging-market status by index provider MSCI Inc.

Although central bank Deputy Governor Jameel Ahmad last month played down concerns over the nation's deteriorating external position, some analysts are speculating that Pakistan will need to seek International Monetary Fund or bilateral Chinese support.

Read more: Pakistan's Economy Juggling Positive Growth But Fragile Deficits

“The political environment in Pakistan has been deteriorating and further instability could come from the general election scheduled for 2018,” said Mark Baker, a Hong Kong-based portfolio manager at Aberdeen Standard Investments. “Bonds have already materially under-performed to reflect the worsening political and macro outlook.”

Abbasi's government is betting that more than $55 billion of Chinese finance infrastructure projects across the country will boost economic growth to the fastest in more than a decade. However, China's Belt and Road initiative is also adding to a surge in imports, which has contributed to the deterioration in Pakistan's current account position.

The World Bank estimated in October that $17 billion of external financing -- or 5 percent to 6 percent of gross domestic product -- is needed in the current financial year through June for Pakistan to bridge its debt payments and current account deficit, which more than doubled to $14.4 billion in the year through September.

Abbasi reiterated that Pakistan, which has received 12 IMF loans since 1988, doesn't need a bailout.

“This deficit is temporary as you are in expansion phase where machinery and other things are increasingly being imported,” he said. “This deficit will go away when the growth comes.”

--With assistance from Carrie Hong

To contact the reporter on this story: Ismail Dilawar in Islamabad at mdilawar@bloomberg.net.

To contact the editors responsible for this story: Chris Kay at ckay5@bloomberg.net, Ruth Pollard

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