Pakistan PM Imran Khan's PTI-led government will face a no-confidence vote in the National Assembly (lower house of parliament) up to a week after the 25 March start of the parliamentary session (ie by 1 April at the latest).
There is a higher probability of PM Khan surviving the vote than is generally portrayed in mainstream media (or most sell-side research) coverage.
The original grounds for the support he enjoys from the military-intelligence deep state remain, the opposition is still as prone to division as it was a year ago when its protest movement fizzled out, and the mass popularity of Khan may have increased as the efforts of the opposition to bribe ruling coalition members into defection has come to light — at a minimum, the passions of his hardcore support base have been inflamed.
Nevertheless, the chances of a loss are sufficiently high and the repercussions are sufficiently serious to consider the consequences.
Any loss may be subject to lengthy legal challenge, if it is the result of ruling party members "crossing the floor".
Whatever the vote's outcome, it should not jeopardise adherence to the IMF programme. About half of scheduled disbursements until September 2022 remain. The 7th review is ongoing and is subject to the distinct risk related to recent slippage on fuel and electricity tariffs.
The “united” opposition (PDM) represents no more than an amalgam of disparate established politicians and parties united by their twin desire to oust the PTI and to derail ongoing criminal prosecutions into alleged corrupt activities.
The opposition has highlighted "economic mismanagement" in its motion for the vote. But it is not offering an alternative economic policy framework in the short-term amid the spike in fuel and food prices, or alternative sources of external funding instead of the existing combination of the IMF, other multilaterals, China, and the public debt markets.
Indeed, should PM Khan lose the vote and the path to the next election accelerate, then an interim government, with no political accountability, would be more likely than either a PTI or opposition-led government to implement the measures required under the IMF programme.
Whether structural reform that sticks — eg anti-corruption measures, improvement in security and rule of law, deep-rooted reform of state-owned enterprises, growth of non-agricultural exports — has any chance of progressing without a government led by PM Khan is an entirely different matter.
But if the vote of no confidence is lost and an early election results, then Khan and the "core" PTI is still most likely to be in pole position to form a majority in the next parliament both because this episode may have actually increased its mass appeal while discrediting the opposition parties (as well as any defectors) and because Khan and the core PTI still remain the most effective partners in civilian government for the military-intelligence deep state.
IMF loan at risk of delay not derailment
Despite economic mismanagement being one part of the opposition rallying call against the government, there is very little disagreement over what macroeconomic policy should look like in the short term.
Essentially, all parts of the political spectrum subscribe to as much fiscal populism, in the face of Covid and rampant global commodity prices, as the IMF and public debt markets will tolerate. All politicians – whether they publicise it or not – and the military-intelligence deep state accept that the era of wholesale and unconditional bail-outs from Saudi and, more recently, China, without the policy anchors of an IMF programme, has likely passed.
Therefore, the vote of no confidence should not have a bearing on the IMF programme, where half of the scheduled disbursements of the US$6bn loan remain, and the seventh review is ongoing (and is subject to its own risk related to the recent populist relief package on fuel and power prices).
Indeed, should there be an early election, then the appointed interim government, which usually sits for a 2-3 month period and is generally apolitical in terms of party affiliation, is most likely to favour technocratic policy over populism.
At worst, the impact might be a delay in the completion of reviews as scheduled because of changes in government personnel; eg the current Finance Minister Tareen has publicly stated that he would not continue in the event there is a change in government. Delays in reviews have been a feature of this IMF programme already.
The differences in economic policies between the PTI government and the opposition are much more critical for the longer-term, eg anti-corruption, tax collection, welfare provision, state-owned enterprise reform, and exchange rate flexibility.
Vote of no confidence arithmetic
The opposition require about 10 members, ie 3% of the total National Assembly, to join their ranks in order to win the vote. These defectors could come from the 24 members of non-PTI parties that are part of the ruling coalition or from "floor crossers" from the PTI itself.
In the latter case though, this is likely subject to a lengthy legal challenge on two fronts, which could delay either the vote itself or the sequence of events following it.
The issue in the vote itself is whether “crossing the floor” triggers an automatic disqualification from the party and a by-election in that constituency. The role of the Speaker of House, Qaiser, under whose instruction the vote is carried out, could be critical and he hails from the PTI.
Separately, there will also likely be a legal challenge by the PTI over those members of the National Assembly accused of "horse-trading" (receiving cash for their votes).
Prior to the vote, both the PTI and the opposition are planning rallies in the capital Islamabad. There is low probability of serious violence. Instead the rallies are intended to provide a signal of each's grassroots strength.
In particular, the PTI wishes to send a signal to any potential defectors that their electoral strength is derived from the Imran Khan brand, rather than their own one, and that given the public nature of the vote of no-confidence, the mass of PTI supporters will be fully aware of the identities of the individual defectors.
But the PTI is also sending a signal to the voter that matters the most, speaks the least, and never actually casts a vote at the ballot box — the military-intelligence deep state.
Deep state agenda
No civilian government in Pakistan can rule without the tacit support of the military-intelligence deep state. This is not the first or the last "hybrid regime".
As important as the votes that members of parliament cast in the upcoming vote of no confidence is whether the civilian government led by Prime Minister Imran Khan's PTI still has the vote of that deep state.
Why PTI in the first place?
To chart a path through the latest political drama in Pakistan, it is worth revisiting the original basis for the military-intelligence deep state and the PTI being on the same page.
This was a pact based on the deep state's realisation that law and order had to improve, economic performance had to improve, and that the traditional civilian political parties were not effective partners for these endeavours.
Those traditional parties may have been very effective partners during an era when the deep state was supported by the likes of the US or Saudi, interested only in Pakistan's military capability rather than its domestic welfare, and when the deep state was more interested in gouging what value it could from the assets in Pakistan's political economy.
But those external partners have been replaced by China, which has a vested interest in domestic stability because it is building supply chain infrastructure through Pakistan, and the assets of the domestic political economy have been pillaged to a point of near exhaustion (evidenced by high domestic currency and hard currency government debt, circular debt in the utility sector, the decrepit state of government-owned enterprises, and the diaspora “brain drain”).
The deep state needs Pakistan to be secure and for its economy to grow. Without combatting terror attacks and chronic insecurity in urban areas, stabilising and rebooting the economy amid a youthful and social media-savvy population, and regenerating broken government institutions at both the federal and provincial level, there will be little left worth dominating as a deep state.
The core PTI still represents a more likely civilian partner to pursue those goals than the traditional political parties. That is because the core PTI has less to lose from breaking the vested interests which have thrived at the expense of the political and economic fabric of the country.
And, in turn, this is why the marginal political parties and fringe politicians from the established political parties aligned, over the course of the 2018 election, with the core PTI.
Episodes like this vote of no-confidence could be interpreted as a final stand by the established political parties, fearful that should the PTI establish a much larger majority after the next election then their survival is under even more urgent threat.
Ironically, if the vote of no confidence succeeds and it unshackles Khan and PTI from the responsibilities of governing, then it may make them an even more formidable force at the next election.
Of course, should that come to pass, then investors will more likely head for the exit rather than wait for a credible, pro-reformist government to return.
The stakes in the no-confidence vote
In the short-term, most will consider that the continuity in economic policies that keep the IMF programme on track – with its associated badge of credibility – is at stake. The 7th review is ongoing and scheduled future disbursements amount to about half of the US$6bn extended fund facility.
In reality, because the opposition is not proposing an alternative short-term economic policy, this is likely not the case – putting to one side delays resulting from any change in government personnel. And an interim government prior to any election, on the basis of past precedents as far back as 1993 (under caretaker PM Qureshi), is likely to be even more faithful to IMF conditions than a popularly elected one.
In the long-term, at stake is the best chance that Pakistan has to reform its internal law and order, governing institutions, state-owned enterprise institutions and welfare safety net, and to embed grass-roots political awareness and democracy more deeply.
PM-COAS byplay a conspiracy theory too far
The failure of the united civilian political opposition to sustain either a protest movement or its internal cohesion in 2021 suggested that the movement, to the degree it could be described as one (as opposed to a shared interest in evading prosecution for corruption), had fizzled out.
The 8 March tabling of a parliamentary resolution for a vote of no-confidence in the government and the public suggestion that ruling coalition defectors will give it the simple majority in the lower house that it needs to win the vote, implies that it is very much back.
There is speculation locally that its revival may have as much to do with behind-the-scenes byplay between the heads of the military and civilian governments, as any success mobilising grassroots opposition to the government's economic policies.
The three-year term of Chief of Army Staff, Qamar Javed Bajwa (61 years old), expires in November 2022 and he is up for his second renewal. His reappointment is at the discretion of the Prime Minister.
PM Imran Khan renewed Bajwa's term at the end of 2019, but the two appeared to be at loggerheads during the process of appointing the new head of Inter-Services Intelligence (ISI) at the end of 2021.
However, after that initial disagreement there appeared to be a meeting of minds over the ISI appointment and there are still eight months left before the Chief of Army Staff decision.
PM Khan is fulfilling a useful foreign policy role for the deep state by acting as “the front office” face on matters such as interaction with Russia when it is a pariah for the “Western” coalition (interaction which has strategic value for Pakistan, given perpetual friction with India) and conducting diplomacy with the over 50 countries represented by the Organisation of Islamic Cooperation (which is convening in Pakistan just before the no-confidence vote and shortly after Pakistan's representative at the UN introduced the successful resolution for establishing the International Day to Combat Islamophobia at the UN).
Most important of all, at no point during PM Khan's government has the civilian administration challenged the effective budgetary autonomy of the military or its supremacy in matters of national security.
The notion that Khan has become an unreliable partner for the deep state looks a conspiracy too far – while he has not been as malleable as some elements in the deep state may have wished, he likely poses a much greater threat to the deep state if he is out of power, as an opposition agitant, than as a part of the government.
After selling off sharply in the wake of Russia’s invasion, we wrote on 7 March that the selloff had exceeded what was justified by fundamentals. Indeed, since then the PKSTAN 7 ⅜ 04/08/2031s have rallied by 9.75pts (15.5%) to US$75.4 at cob on Friday (with the mid-YTM falling by 235bps to 11.9% over that period).
However, it is still a notable underperformer in the emerging market space ytd, with the EMBI Pakistan index down 19.2% in total return terms (+426bps spread) versus 9.0% for the EMBI Global (+69bps) through 18 March.
The progress of the 7th review — eg the granting of leniency for the recent easing of fuel and power tariffs — should have a greater bearing on the short-term investment case than the vote of no confidence, and, as we argue above, the two are not necessarily linked.
In the meantime, we maintain our Buy recommendation on Pakistan’s eurobonds at US$75.4bn (11.9% YTM) on a mid-basis as of cob on 18 March on Bloomberg.
Equities (KSE100 index) are down 18% in the past 12 months and down 6% ytd, compared to MSCI FM up 12% and down 8%, respectively, as of cob on 18 March.
Trailing PB is 0.9x (for 19% ROE), a 23% discount to the 5-year median. Forward PE is merely 4.5x (for 5% earnings growth and 8.2% dividend yield), a 36% discount to the 5-year median.
Pakistan is one of a long list of markets that are too small, in terms of index weight (it is not in MSCI EM and is merely 2.95% of MSCI FM 100) and liquidity (last 6m ADV below US$40mn) to matter for mainstream global emerging market investors.
However, for those few surviving dedicated frontier market investors or for local investors, then any weakness surrounding the vote of no confidence should be viewed as an opportunity.
Pakistan: The reform story foreigners forget, February 2021