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Well in to its fourth month in power, the Nawaz Sharif government still appears to be groping to get a handle on the twin challenges it promised in its election campaign to address quickly — arrest the economic decline and improve the deteriorating security condition that is affecting investment and growth.
The markets were recharged when it paid off the unpaid bills of the power companies and successfully negotiated a $6.6 billion loan deal with the International Monetary Fund (IMF) to avert a looming balance of payments crisis. Many businesspeople also favoured its offer of unconditional dialogue to the militants for bringing back peace. The government, it seemed, was moving in the ‘right direction’.
But the events of the last one month are believed to have shattered, at least partially, the business confidence in the government’s ability to effectively deal with the challenges it faces. The recent volatility in the foreign exchange market and the inaction of the present finance managers to timely intervene to stop the rupee’s slide; the government’s failure to significantly cut energy shortages for industry, and the increase in terrorist attacks, have disappointed many.
The benefit of the doubt that most businesspersons were willingly to give to the new government in its early days is now being replaced by skepticism and uncertainty.
“If the government thought it could take care of the sliding economy by ‘outsourcing’ it to the IMF, it was gravely mistaken,” said a businessman who did not want to reveal his identity because of his friendship with some federal ministers.
“They (the government) may not agree, but the reality is that the economy is getting into a deeper mess,” he argued.
He has a point here. While the power supply has somewhat increased, little progress has so far been made on fresh generation or the planned gas imports through pipelines or in the shape of LNG.
The fear of macroeconomic slippages has increased in spite of the agreement with the IMF. Prices are soaring, rapidly eroding the savings and incomes of the people in the fixed income bracket. The inflationary government borrowing from the central bank in the first two-and-a-half months of the current financial year has grown by 159 per cent to Rs804 billion, compared with the funds it had borrowed from the bank during the entire last year fiscal.
The rupee has emerged as one of the most volatile currencies in Asia since July. Its depreciation has not only fueled inflation, but also added an additional half a billion rupees to the public debt.
The possibility of more fiscal pressures in the form of an increase in the power subsidy (to the tune of 0.6-0.8 per cent of GDP) because of rising fuel cost on the back of the weakening exchange rate and the delay in upward revision of electricity prices cannot be ruled out.
The tax collection in the first two months of FY14 to August has fallen short of the target. The external sector remains precarious, as exports are falling and the economy is forecasted by the IMF to expand by just 2.5 per cent this year, against the budgetary target of 4.4 per cent.
“The problems facing the economy are enormous and the government cannot solve them in such a short time of four months. Frankly, we (the business community) were not expecting any miracle when Nawaz Sharif took over power. But we were anticipating some tough decisions by the government to deliver the economy from its troubles,” said a manufacturer who also requested anonymity.
“The first tough decision of paying off the unpaid bills of the power companies had given us hope of a better future. But our hopes for a quick economic recovery have been dimming ever since the government swooned into inaction and confusion seemed to have overtaken its finance managers.”
“Even the hopes of the IMF package delivering us from economic problems have faded because of its strict pre-conditions that focus on stabilisation rather than growth and its refusal to frontload a chunk of the loan. On top of that, the militants are not relenting in spite of the peace talk offer,” he insisted.
The loss of the business confidence was evident from the rapid fall in the stock market; the increase in the demand for dollars, and the slowing investment in real estate. Some analysts argue that the future economic outlook looks grim.
“Panic rules the market. The SBP’s foreign exchange reserves are negative if debt repayments and other outflows scheduled for this year are taken into account. People are converting their current accounts into dollars. Fiscal and inflationary impact of the exchange rate weakness will be large. The economic fundamentals are not looking up.
And the government is not moving a finger at all,” a financial analyst at a bank, who refused to give his name, said hours before the central bank pumped dollars to stabilise the rupee last Thursday. “The situation will get very nasty over the next couple of months. How will the government get a handle on it is a mystery.”
Another analyst at a brokerage house in Karachi, who also spoke on the condition of anonymity, agreed that the anxiety in the market would deepen and investor confidence would erode unless some senior official took the trouble of explaining the situation and the measures the government was planning to take over the next few days to six months to fix the economy.