With politics taking center stage in Pakistan, the economy is hit
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Ever since the opposition parties in Pakistan submitted the no-confidence motion with the National Assembly on March 8 to dislodge Prime Minister Imran Khan, the economy has suffered from political uncertainty. Between March 18 and March 25, foreign exchange reserves held by the State Bank of Pakistan (SBP) fell by 19.4 percent. Moody’s — the rating’s agency — has stated that the vote of no-confidence has resulted in a negative outlook on Pakistan’s rating. The credit default swap (CDS) premium – an instrument that is indicative of the risk of a country of defaulting - for Pakistan has risen from around 4 percent to an all-time high of 10 percent. This will increase the cost of raising funds for the country in global bond markets. The uncertainty is also reflective in the value of the Pakistani rupee over the last four weeks, which has depreciated from 180 to 185 against the US dollar.
The International Monetary Fund (IMF) has stated, “The Fund looks to continue its support to Pakistan and, once a new government is formed, we will engage in policies to promote macroeconomic stability, and enquire about intentions vis-a-vis program engagement.” They have however clarified: “There is no concept of suspension within IMF programs.” While it is reassuring that the Fund remains engaged with Pakistan, the statement nevertheless reinforces the need for political stability. Access to multilateral facilities is effectively tied to greater policy certainty. The concerns about policy continuity are exacerbated when it is unclear who the next finance minister will be and for what period. Moreover, the incumbent SBP governor’s tenure comes to an end in May, and it is not certain if Dr. Reza Baqir will be retained by the next government.
There can be little doubt that whichever political party forms the next government, it will need to take tough economic decisions that are unlikely to be popular with the electorate. The necessary reforms will necessarily be painful and erode political capital. Petroleum prices and power tariffs need to be significantly hiked and will adversely affect the public. But these measures are almost certainly going to be necessary conditions that will have to be implemented for the continued support of the IMF to promote macroeconomic stability through the EFF program.
Across the political spectrum, politicians do not understand that for increased productivity and global competitiveness, resources need to be permitted to move from less productive to more productive activities.
Javed Hassan
Depending on the Supreme Court’s decision regarding the case of the deputy speaker of the house dismissing the no-confidence motion, if the next government formed is not a caretaker administration just to oversee elections, it is likely to present the upcoming budget and stay longer than three months. Such a government is unlikely to implement harsh measures that will erode its political capital. Even if there were a caretaker government it would also be reticent to take major policy reform decisions.
The outgoing PTI government started off with a commitment to reforms, but political exigence has compelled it to prevaricate on increasing electricity prices over the last six months. Other structural changes have also been put in abeyance. For example, instead of hiking rates, it provided subsidized power to the export sector industries in the hope that increased consumption will help lessen the circular debt. Unfortunately, that strategy appears not to have had the desired outcome of controlling the ever-expanding power sector circular debt.
Despite this failure, the leading opposition party, the Pakistan Muslim League (PMLN), has indicated that if it forms the next government it would cut power tariffs by 40 percent. The flawed policy prescription arises from the underlying assumption that consumption will increase to an extent that it will absorb the excess generation capacity that the government has guaranteed to purchase. While there is little evidence to support that, political parties seem to have learnt little from their own past mistakes or that of the outgoing government.
Across the political spectrum, politicians do not understand that for increased productivity and global competitiveness, resources need to be permitted to move from less productive to more productive activities. This requires policies that would enable fundamental changes. These include policies to remove excessive protection and subsidies, and to replace the current complex maze of customs and regulatory duties with a uniform tariff across all sectors and product categories.
The much-needed structural change also requires the next government to remove all kinds of untargetted subsidies, eliminate price controls and let free markets determine prices, and most importantly promote competition both from within the country and without. Such reforms will invariably result in disruption for many sclerotic businesses/industries that will have to either improve efficiency or be scrapped. The public will also have to endure hardship in the short-run. However, in order to ensure sustainable economic progress, the next government must allow for such a transformation to take place, and for that it must have the vision and a strong mandate from the public to do what is necessary.
– Javed Hassan has worked in senior executive positions both in the profit and non-profit sector in Pakistan and internationally. He’s an investment banker by training.
Twitter: @javedhassan
