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Pakistan Enters Economic Chaos Amid Nawaz Sharif Corruption Charges

By Polina Tikhonova. Originally published at ValueWalk.

Pakistan is on the brink of political and economic chaos, as PM Nawaz Sharif corruption charges keep mounting.

Pakistan enters the state of uncertainty as the nation is headed toward the general election in 2018. As the Joint Investigation Team (JIT) finds new evidence that Prime Minister Nawaz Sharif and his family may be corrupt to the bones, the opposition is calling for Nawaz’s resignation.

Nawaz Sharif Corruption Charges
By Prerna goyal (Own work) [CC BY-SA 4.0], via Wikimedia Commons

The economy of Pakistan was quick to respond to the mounting Nawaz Sharif corruption charges, as the market – still bleeding from reaching the bottom last week – is likely to remain volatile amid the political saga surrounding Nawaz and his family’s corruption scandal.

Despite the accelerating growth of the Pakistani economy these couple of years – spurred mostly by the China-Pakistan Economic Corridor (CPEC) progress – the economy is “likely to slow” in 2018-19, according to a new Capital Economics study, and the ongoing investigation into the government’s corruption is only making the economic decline worse.

Nawaz Sharif Corruption Scandal Downs Pakistan Economy

The JIT made public its final report into Nawaz Sharif corruption scandal earlier this week, and the markets were quick to respond to the volatile political situation. The six-member JIT, which was set up by the Supreme Court in May, found “glaring disparities” between Nawaz and his family’s known sources of income and their actual wealth.

The findings put Nawaz and his family into legal jeopardy, as the investigators want the controversial Prime Minister and his family booked for corruption charges. As the Pakistan election date nears, Nawaz’s political opponents are calling for the PM’s resignation.

As the JIT has recommended filing a reference against the Nawaz family with the National Accountability Bureau (NAB) on corruption charges, the possibility of Nawaz stepping down is as high as ever. However, a July 11 research analysis by Credit Suisse projects that “even in the event of the PM stepping down, we do not see the possibility of early elections as an in-house change can be done.”

Pakistan Economy to ‘Slow in 2018-19’: STUDY

While the political career of Nawaz remains vague, the Nawaz Sharif corruption scandal has taken a toll on the Pakistan Stock Exchange performance. The benchmark KSE100, which was elevated from frontier to emerging market in May, has dropped a whopping 17% over the past two months.

Economic uncertainty created by the political drama of the Nawaz Sharif corruption scandal does not seem to help the Pakistani economy in the long-term either. As Islamabad could enter one of the biggest political crisis in its history in case the Supreme Court rules that the Nawaz government is corrupt, the Pakistani economy is headed toward its seemingly inevitable decline.

In the study published just days prior to the JIT revelations about the Nawaz Sharif corruption charges, Gareth Leather and Krystal Tan of Capital Economics predicted the decline of the Pakistani economy ahead of the 2018 election. Against the backdrop of the Pakistani rupee’s devaluation last week, the researchers argue that “Pakistan will soon be forced to either let the currency fall much further, tighten monetary policy aggressively, or make another loan request from the IMF.”

Nawaz corruption

Despite an economic acceleration spurred by CPEC and an increase of imports, Pakistan’s economic advances have “contributed to a sharp widening of the trade deficit over the past year,” the study concludes. Besides, the Pakistani central bank has been exhausting its foreign exchange reserves, which “have fallen by 15% since their peak at the end of last year,” according to the study.

Nawaz corruption

Nawaz corruption

The Pakistani economy is “likely to slow in 2018-19,” the study concludes.

Will the Nawaz Government Fix the Economic Decline Before 2018 Election?

As the ongoing economic decline is begging the authorities to take the situation under control, not much is expected to be done before the 2018 election, as the Nawaz government “will want to avoid any sudden shocks to the economy,” the study warns. Even in the event of the PM stepping down amid the mounting Nawaz Sharif corruption charges, there is a low likelihood of the Pakistani authorities taking up emergency measures to fix the economic decline.

Once the Pakistan election, which is set to be held in summer 2018, is over, Capital Economics forecasts that the new government will likely respond by heightening interest rates as well as letting loose of the currency a little bit. The possibility of the new Pakistani government returning to the IMF for help should not be ruled out either.

Nawaz Sharif Corruption Scandal Scares Investors Away

Reviewing the effect of the Nawaz Sharif corruption scandal on the Pakistani stock, Forbes forecasted on Tuesday that the KSE-100 dropping 2,153 points in the wake of the JIT revelations was “just the beginning.”

The Nawaz Sharif corruption scandal has spooked foreign investors, who are starting to think twice before pouring their money into Pakistan, the nation that nearly a year ago was proclaimed the top-performing market in Asia with a staggering 46% return. It’s not only the ongoing corruption investigation that scares investors away, but also the growing capital and financial account deficit of the Nawaz government.

In the first quarter of 2017, a capital and financial account deficit of $989 million was recorded in Pakistan while capital flows in the country averaged -$782.17 million in the period between 2011 and 2017, according to Forbes.

The JIT investigation is focused on the 2016 Panama Papers leak, which revealed that the children of Nawaz were among those having off-shore accounts. The 2017 investigation has concluded that the Nawaz family failed to publicly declare a huge amount of assets.

How Likely is Nawaz Stepping Down Amid the Corruption Charges?

Nawaz could be removed from his position of Pakistan PM in the event of the Supreme Court ruling that Nawaz has disguised his assets or has provided an inadequate explanation of the sources of his assets. If Nawaz stepped down, the Pakistani parliament would have to elect a new PM.

As the Nawaz government is hanging by a thread, the PM’s political future looks gloomy at this point. Although Nawaz’s PML-N party holds a majority in the parliament, the resignation of the party chief would substantially decrease the party’s chances of winning the 2018 general election.

The post Pakistan Enters Economic Chaos Amid Nawaz Sharif Corruption Charges appeared first on ValueWalk.

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