The new government is going to take over an improved economy but the challenges ahead are tough. The military-led regime is going to hand over to the elected government $6 billion reserves. (Out of a total $8.2 billion reserves, the State Bank owns $6 billion and the remaining $2.2 billion is owned by the banking system.)

The new government is going to inherit also a low inflation rate—a little below four per cent. When General Pervez Musharraf had taken over in October 1999 in a bloodless coup against the than elected prime minister Nawaz Sharif, the country had total liquid forex reserves of about $2 billion and inflation was around six per cent. So a change for the better seems to have taken place.

But why only talk about the reserves and inflation. Because the economic managers of the present regime frequently refer to these indicators when they talk about how hard they have worked to advance the economy. The much-talked about improvement on external account is also a by-product of the higher forex reserves.

The higher reserves and lower inflation rate really throw a big challenge for the new government. Maintaining the present level of reserves may be or may not be a major problem for the new government. But maintaining the present level of exchange rate is really going to be a tough task. On the other hand, keeping inflation as low as it is now may be or may not be an acid test of the performance of the new government. But bringing the lending rates down to a desired level would really be a big problem for them.

It all depends who are going to form the new government—and whether the present economic managers are going to find a place in the new set-up or not. If the present economic managers’ team led by the Finance Minister, Shaukat Aziz—or he himself alone—finds a role in economic policy making in the new government then today’s challenges may easily turn into tomorrow’s achievements.

But if Shaukat Aziz alone or along with his other members of economic managers team does not get any role to play in the new set-up, then it may really be difficult for the new government to pick up the threads.

There seems to be a consensus on the point among big businessmen that Shaukat Aziz should continue. Since General Musharraf is going to continue as the president of the country he may like any or all three of his economic managers to continue in the new government.

Apart from what generally is being expected or speculated, one thing is worth taking note of. Finance Minister Shaukat Aziz has been making public statements about the room being available for more cuts in lending rates. He has also made several statements on the State Bank policy to keep the US dollar stable by mopping up extra inflows of foreign exchange from the inter-bank market. He has said more than once that the US dollar may fall to Rs55 if the SBP stops intervention.

Whereas these statements may serve as a morale booster for the nation they serve another purpose: that is, raise public hopes to a level which becomes a bit too difficult for the new government to fulfil. Because that is where Aziz may become inevitable—to translate today’s hopes into tomorrow’s realities. But bankers and economists know that keeping exchange rate artificially in favour of the rupee and maintaining a stable monetary policy at the same time is not too easy.

Since mid-February the SBP has kept the monetary policy stable despite the fact that the inflation rate has been well within the target and the exchange rate has remained stable. On the other hand the dollar is also being defended at a level much higher than its real worth—around Rs 59 against Rs 55 as the FM says. Now if the new government stops defending dollar to create room for more cut in lending rates and allow it to fall sharply the powerful lobby of exporters will become hostile. And if it keeps the exchange rate where it is now the consequent increase in the rupee liquidity levels may increase inflation particularly if the monetary policy is also eased off—and the private sector credit starts picking up. And there is no denying the fact that the monetary policy will have to be eased off because there is a limit to which the SBP can absorb surplus liquidity from the market.

Bankers and economists say that the new economic managers will have to set free either the exchange rates or the lending rate structure. “You cannot have a cake and eat it too,” says head of a major foreign bank pointing to the fact that the exchange rate is being kept stable on the one hand—and on the other attempts are being made to disallow the lending rates to become market-based—referring to the SBP strictures issued to some banks last week that they should not pick up signals of monetary policy from the statements issued by the FM or anybody else but strictly from the actions of the State Bank.

Now if the new government has in its cabinet one or some of the present economic managers they too will have to do the same: release the exchange rate or the lending rate. The outcome of releasing either of the two—whether by new economic managers or the old ones continuing—will be the same. The difference will lie in how the outcome is interpreted. Naturally the outcome—be it an export-damaging fall of the dollar in case of releasing exchange rates or inflation soaring up in case of easing of the monetary policy—would complicate things for the new government regardless of who are and who are not part of its economic policy making.

So the new government will have to be careful on this account particularly given the fact that General Pervez Musharraf will be continuing as the president. He will naturally put different meanings to the triumphs and failures of the new government taking care of the fact whether his economic policy makers are part of the new setup or not.