LAST week I was in Muzaffarabad, presenting a medium-term outlook for the economy at the strategic offsite meeting of one of Pakistan’s largest banks. The views from the conference room, atop Domail where the rivers Neelum and Jhelum meet, were stunning. But having been to Muzaffarabad after the tragic earthquake of 2005 and seeing the devastation first-hand, I knew that underneath the beautiful sight lies a natural fragility — the city is astride a fault-line.

In much the same way, the seemingly pretty picture of the economy painted (and viewed) by the government over the past one year, is fraught with vulnerabilities that are being exacerbated by some poor economic decisions and management.

Three areas that stand out where the government’s management is detrimental to the interests of economic stability and growth are: exchange rate management, reforms in the power sector, and slow restructuring of public-sector enterprises. (I have excluded the pace and direction of tax reform and public debt management for a more detailed treatment in a subsequent column). If a course correction is not brought about quickly, or the desultory pace of reform picked up in these areas, the good work done in stabilising the economy over the past year will be lost and amount to nothing.

Exchange rate: By virtue of pursuing a stated goal of bringing the exchange rate below a hundred rupees to the greenback, the government has insensibly triggered a substantial real appreciation of the rupee. Between December 2013 and July this year, the real effective exchange rate has appreciated nearly 12pc, according to the State Bank. At the same time, growth in exports has not only stalled but declined, with export receipts falling in comparison to year-ago levels for five consecutive months since April this year. Were it not for the substantial prop to overall exports from the operation of GSP Plus to the EU since January this year, the fall in exports would have been much sharper.

The seemingly pretty economic picture painted by the government is fraught with vulnerabilities.

To be sure, an important factor that has affected Pakistan’s exports during this period has been the reversal of fortune of our yarn exporters in the Chinese market. Nonetheless, evidence of the negative impact of exchange rate management on the external account comes also in the form of a rise in imports, especially non-oil, non-food imports which have risen sharply in the past few months.

The fall in exports and a steady trend of rising imports could not have come at a more inopportune moment — at a time of continuing vulnerability of the external account.

Power sector: A combination of a spike in oil prices and extremely incompetent handling of the power sector between 2008 and 2013, has cost Pakistan dearly. Most estimates of the ‘lost’ GDP converge around 2pc a year, though my estimate of aggregate losses is higher.

The received wisdom from the World Bank and the IMF on the source of the problem has focused on a singular dimension: the mismatch between the cost of supplying electricity and recovery from final consumers. This line of reasoning has proven to be both simplistic as well as self-defeating in many ways for reforming the power sector.

There are at least three elements to the power sector’s problems. The first is fiscal, and the inter-connected issues of cost-recovery, circular debt and the budgetary burden of subsidies. The second element is of affordability, and the impact of rising tariffs on the price level as well as business costs and competitiveness. The third dimension of the issue relates to balance of payments sustainability, and the question of our ability to pay for the fuel imports to meet the requirements of the power sector.

The PML-N government’s response has focused mainly on adding new generation capacity to ‘solve’ the problem of load-shedding by 2018. While a part of the new capital investment in the power sector is intended to focus on fuel substitution, thus addressing affordability as well as balance of payments pressures to an extent, the bulk of the new projects are net additions to the grid capacity — and hence will represent an incremental requirement of imported fuel, be it coal or LNG.

Putting together all of the government’s intended projects, even at today’s depressed prices for LNG and coal, the total import bill for fuel will shoot up to $23 billion to $25bn in the next five to seven years. What will be the incremental sources of foreign exchange to pay for this, especially when government policy combines an anti-export bias in the exchange rate with its dangerous corollary, a sympathetic import regime? And, if we won’t be able to pay for the fuel, why build the capacity and incur a capital cost and a deadweight loss?

Restructuring PSEs: While some progress has been made with Railways, almost all the other PSE’s that are a drain on the budget, such as PIA and Pakistan Steel, continue to operate with marginal improvements at best, waiting for the next ‘bailout’ package from public money. So far, the government has conducted a few successful capital market transactions where it has offloaded shares in UBL and Pakistan Petroleum Ltd. It is also likely to meet with success in selling shares of OGDCL and HBL, which the government expects to bring in close to $2bn combined.

However, the divestment of shares by the government is not privatisation — only a transparent strategic sale to an experienced and competent private sector management that is not funded by taxpayers via the absorption of liabilities, will bring success. In addition, the definition of success that should be adopted is not the raising of money through the process — but on the long-term financial sustainability and profitable operation of the privatised entity.

While the ongoing political protests are a distraction, the air pocket hit by the economy is less a result of politics and more a function of economic management that needs improvement.

The writer is a former economic adviser to government, and currently heads a macroeconomic consultancy based in Islamabad.

Published in Dawn, October 3rd, 2014