THE government seems to be building a new narrative based on the political ‘crisis’ and floods as a way out of some immediate policy actions required under the International Monetary Fund programme.

It has decided to convert the challenges posed by the sit-ins in Islamabad and the floods into opportunities to gain some breathing space before taking tough structural decisions. It presents its first year in office as a success story on the basis of a 4.14pc economic growth, better tax collection, reduction in deficit and inflation numbers, and a stable currency.

In the process, it wishes to secure support from international donors to rehabilitate people affected by the military operation in North Waziristan and by the floods.

The cost of rehabilitating internally displaced persons (IDPS) from North Waziristan has been estimated at around $2bn. An exercise for damage assessment and recovery assessment is expected to take another 2-3 weeks to be completed, before the full picture — comprising both IDPs and floods — is presented to international lenders, some of whom still have surplus funds at their disposal for humanitarian assistance left from past natural disasters in other parts of the world.

Finance Minister Ishaq Dar has made it clear the government is in no mood to increase power rates in the near future

As far as increasing electricity tariff — required under IMF conditionality — is concerned, it would cause the loss of a humanitarian face for the multilateral institution to press for increasing the cost of living when the target people are hit by natural disasters.

Therefore, Finance Minister Ishaq Dar has made it clear that the government is in no mood to increase power rates in the near future. After the super floods of 2010, the IMF had not only provided emergency support to Pakistan but also relaxed some policy criteria, instead of seeking their upfront implementation.

Procedural changes could, however, be made to redefine and make adjustments in net domestic assets (NDA) and waivers for borrowing to satisfy the multilateral bureaucracy. Independence of the central bank is a parliamentary issue that could be described as a ‘work in progress’ to move forward. The international environment is favourable given the expected changes taking place next door in Afghanistan.

The government has now prepared a policy paper that argues that the political situation created by Mr Khan and Mr Qadri has not only impacted the current pace of economic development, but has also badly damaged the image of the country and investor confidence. The floods have added to the adverse impact on the economy, it says.

“Due to the political situation, foreign investors have adopted a wait-and-see policy,” and are closely monitoring the situation as they need political stability for their investment. Foreign direct investment has a direct impact on domestic investment, and it is yet to pick up. And to attract foreign investors, domestic investment has to play a key role.

The government argues that declining FDI will put more pressure on the external account, particularly in the wake of the widening trade gap due to falling exports. The present government has been struggling to attract foreigners to bridge the investment gap, but the law and order situation and a host of other factors are also scaring investors away.

The recent cancellations or postponements of visits by heads of state of Sri Lanka, Maldives and Qatar are a few major setback. “The postponement of the Chinese president’s visit aggravated the perception. Chinese investment here could have attracted more investment from other countries,” the paper argues.

On the other hand, exports during July-August declined by 5.8pc while imports increased by 9pc. The government had set the export target for the current fiscal at $26.9bn and the import target at $44.2bn. To achieve these targets, exports are to be above $2bn and imports $3.9bn per month. The additional cost to the import bill due to currency depreciation has been estimated at about Rs15bn.

The government has started attributing the expected increase in inflation — currently at less than 8pc — to political unrest and floods due to disruption in supply of commodities. In all likelihood, headline inflation could surge, which may lead to a contractionary policy by the central bank. This will further impact private sector credit, hamper economic activity and make the 5.1pc growth target impossible.

The finance ministry also argues that the floods could have an inflationary impact due to extensive damage to crops and livestock, and that the budget deficit could go up due to financing of relief and rehabilitation operations for the flood-affected people. The resettlement of IDPs could also hamper the normal development process.

Damages to transportation and communication infrastructure — and resultantly to social service delivery, including schools and health centres — will adversely affect human capital development over the longer term and lead to loss of livelihood for a large proportion of the rural population.

While the government would have to think beyond the recent policy upheaval to improve its governance style through inclusive and collective wisdom, it should move quickly and decisively to correct some of the longstanding structural ills in the system.

At the top are bleeding public sector corporations, and energy shortages and prices. The PPP paid the price for being ineffective in these areas, and the PML-N would be no exception unless it delivers on the economic front. Opportunists would always be there to exploit.

Published in Dawn, Economic & Business, October 13th, 2014