NEW DELHI — After Pakistan’s government signaled that it would seek a bailout from the International Monetary Fund, Prime Minister Imran Khan this week did the exact opposite of the austerity measures the global body is demanding: He inaugurated a public-housing project to deliver five million homes.
That tension — between Mr. Khan’s campaign promises to build the social welfare state and the prescriptions to help set Pakistan’s devastated economy right — is leaving investors at home and internationally guessing about the policies he truly intends to pursue. But investors typically detest such uncertainty and responded this week by offloading the Pakistani rupee, which hit a historic low, while hammering the stock market with a sell-off, wiping $2 billion off the index’s value.
There is only more uncertainty ahead. On Thursday, the Pakistani government formally began the process of seeking an I.M.F. bailout worth up to $12 billion. But analysts say the country’s financing gap may be as high as $20 billion, leaving investors worried that the government may not ask the fund for a robust-enough package while continuing to ask China and Saudi Arabia for more loans, after taking several billions of dollars worth of loans from Beijing this year alone.
The concern surrounding Pakistan’s economic course and Mr. Khan’s intentions has clearly left the I.M.F. skeptical, and the result may be a tough road ahead for the country if it is to get its bailout.
The fund’s managing director, Christine Lagarde, insisted on Thursday that Pakistan provide “absolute transparency” on its debts, many of which are owed to China as part of its Belt and Road construction program. Pakistan is a showcase for China’s initiative, hosting up to $62 billion of Chinese investments, most financed by costly loans taken from Chinese state-owned banks.
Any bailout for Pakistan would require “complete understanding and absolute transparency about the nature, size, and terms of the debt that is bearing on a particular country,” Ms. Lagarde said, as she prepared to meet the Pakistani delegation later Thursday at the I.M.F. and World Bank Group annual meetings in Bali, Indonesia.
Later that day, the I.M.F. released a statement saying that Ms. Lagarde had met the Pakistani team and that the fund would send a team to Islamabad in the coming weeks to initiate discussions for a bailout program.
Ahead of Pakistan’s July elections, Mr. Khan promised to open up the books on Chinese investments and even cut projects that were unnecessary or too costly. Pakistan’s previous government, led by ousted Prime Minister Nawaz Sharif, was harshly criticized for refusing to publicly disclose the financing terms and conditions around China’s investments, leaving the country in the dark about exactly how much debt it has committed to repay.
Critics of the previous Pakistani government, including Mr. Khan, accuse it of doing a poor job negotiating the Chinese loans and say that the costs were often inflated, leaving Pakistan with a debt load it will struggle to repay. But since coming to office in August, Mr. Khan has not opened the books, perhaps because of pressure from China, officials say. The United States has accused Beijing of using “debt trap diplomacy” to load up countries with debt in order to secure political and military demands, a charge China’s government denies.
Although Pakistan faces an external debt burden of $8 billion this year, the first payments to China as part of the Belt and Road Initiative come due in 2019, with $1 billion owed, officials say. Pakistan’s foreign exchange reserves hit a four-year low last week, hovering at $8.4 billion according to the central bank. That is less than enough to cover even just two months of imports.
“Going to the I.M.F. was inevitable. There was no other way out, not only to bridge the financing gap but to provide confidence to the markets,” said Farrukh Saleem, the spokesman for Pakistan’s Ministry of Economy.
He added: “Even if China had given $26 billion to Pakistan, it doesn’t give confidence to the markets. It’s not just about the bailout but getting into an I.M.F. monitoring program,” which gives investors assurance that Pakistan is taking on needed economic reforms, allowing the country to tap other debt markets.
Although Mr. Khan maintains that he will pursue both the I.M.F. bailout and loans from “friendly countries,” those statements contradict the stance of both his finance minister and information minister, Fawad Chaudhry, who said that the conditions on those outside loans were unacceptable.
“We spoke with the United Arab Emirates, China, Saudi Arabia and held consultations with other countries,” Mr. Chaudhry said in televised remarks Tuesday. “We did not want to take the money the way it was being given to us.”
The information minister did not explain what the conditions were. But Saudi Arabia and the U.A.E. have in the past requested that Pakistan join their war in Yemen, which has bogged down those countries financially while creating one of the world’s worst humanitarian crises as Yemeni civilians are killed by bombing and starvation.
On the campaign trail before the July elections, Mr. Khan championed austerity even as he promised to build an Islamic welfare state. The new project to build five million housing units is a signature part of his “Naya Pakistan” agenda — meaning New Pakistan — to kick-start the economy and provide support to the country’s poorest.
But going to the I.M.F. will likely mean cuts to those welfare state dreams.
“With the I.M.F., there will be an impact on the government not fulfilling its election promises. But welcome to the real world,” said Mr. Saleem, the economy ministry spokesman.
The contradicting remarks coming out of Islamabad have left investors confused about how seriously Mr. Khan’s government will commit to the I.M.F.’s austerity terms. This would be the latest in at least 12 I.M.F. programs Pakistan has undertaken in the last few decades, failing to complete the structural reforms required in all but one bailout package.
“This crisis could have been averted better if the government had declared their plan two months ago, when they came to power. Instead they gave mixed messages, leaving the markets guessing. A lot of damage could have been averted with timely clarity,” said Ashraf Wathra, the former central bank governor under the previous government.
While Mr. Wathra acknowledges that the previous government is at fault for the ballooning national debt, he says Mr. Khan should have taken the overwhelming advice from economists to go to the I.M.F. as soon as possible.
This week, the Pakistani rupee fell as low as 137 to the United States dollar, shedding 10.2 percent of its value. The biggest ever one-day fall was in 1998, when the rupee fell 11 percent after Pakistan tested nuclear weapons.
Pakistan’s business community, and even ardent supporters of Mr. Khan’s party, have also been angry at what many described as “dithering” ahead of the decision to go to the I.M.F.
Farooq Sarwar, a Rawalpindi-based importer of food, toiletries and confectionary items, has said he has had to cut down on his stock, worried stores he supplies will close down as customers cut their spending as the rupee falls in value.
“The dip in the dollar has affected the importers in a way that no one knows what to do right now,” Mr. Sarwar said. “We had high expectations from the current government and thought they will take steps after taking people in to confidence. But it seems they had done no homework.”
Salman Masood contributed reporting from Islamabad, Pakistan, and Alexandra Stevenson from Hong Kong.