System undergoing a stress test

Published December 1, 2014
Illustration by Abro
Illustration by Abro

AS the country’s political temperature rose in the wake of the PTI’s announcement of a public meeting in Islamabad, nervous corporate executives hoped that the nascent democracy — reinforced by improving macroeconomic indicators — would clear the stress test to emerge ever stronger.

While Pakistan’s politics and economy are in a state of transition, the process is not systematic and is often erratic, generating anxiety and pitfalls. The government, political parties and the private sector lack either the vision, intent or the capacity to synchronise gains of parallel key currents that could fuel faster development.

“It is good that a party has rattled the political status quo. As long as their activity stays peaceful and within the ambit of the constitution, I see no reason to be alarmed,” Kamran Y Mirza, CEO of the Pakistan Business Council, said over telephone while commenting on the possible impact of the PTI campaign on the business sentiment.

Some key economic indicators have improved during the year, which has generated cautious business optimism. But the private sector is still generally shy of investing. Some anecdotal evidence even suggests the flight of capital from this cash-starved country.

Inflation and the policy rate are in single digits; the trend of high remittances is steady; the foreign exchange reserves have improved to around $14bn; the rupee is relatively stable at 102 to a dollar; the capital market is galloping; and consumer confidence is high, as indicated by the surge in the retail sector.

The current account and balance of payment deficits are still high, but the GDP is expected to grow by over 4pc. (‘The Economist’ last week reported GDP growth rate of over 5pc for Pakistan).

Little wonder, then, that Moody’s has improved the country’s credit rating.

However, all this has failed to persuade local investors to increase their stakes in long-term investment, which is at a depressingly low level.

According to the Economic Survey of Pakistan 2013-14, private investment, at 8.9pc of GDP, was lower than the previous year’s 9.6pc. There is nothing to suggest that any change has occurred in the declining trend of private investment.


The government has been favoured by virtuous macro-developments. Oil prices are down, remittances are rising, the currency is stable, and inflation has been checked. Something has to go quite wrong to stall the opportunity to build on these positive developments — former SBP Governor Salim Reza


Former State Bank of Pakistan Governor Salim Reza was hopeful. “The government has been favoured by virtuous macro-developments. Oil prices are down, remittances are rising, the currency is stable, and inflation has been checked. Something has to go quite wrong to stall the opportunity to build on these positive developments”.

He felt that the improvement in governance can be decisive for better economic performance.

“The government must vigorously take up its economic agenda and quickly move away from its preoccupation with perceived political challenges. It must reinforce its institutions by making appointments and dispelling the perception of over-centralised and personalised authority, which hampers decision making.

“It should act in the context of a full-term tenure and dissipate the impression of a lack of self-belief by firmly taking up governance challenges,” he advised.

A business tycoon felt that the cause of the PML- N government’s inaction is the resistance in the ruling party to the idea of devolving decision-making.

“It is not an accident that so many decisions are pending. The classic example is that of the filling of vacancies of heads of 53 regulatory bodies and key institutions after the lapse of over a year, in most cases. When every file — regardless of whether the matter falls under the ambit of the law, industry, commerce, textile or water and power ministries etc — has to pass through the table of Finance Minister Ishaq Dar, things will get stuck,” he expressed his frustration.

“The political clique needs to understand that democracy breeds and helps resolve issues in pluralism,” commented another businessman who was frustrated over the inaccessibility of the prime minister and the finance minister to the business community.

A senior member of the government’s kitchen cabinet partially agreed with the assessment. He accepted that the government’s focus needs to be on implementing its agenda, without wasting time and energy on verbal tirades with an opposition that has opted to bypass the parliament and insists on deciding political issues on the streets.

But he also felt that besides his political colleagues, other stakeholders do not quite understand the perils of governance. “The whole system is geared to protect the status quo,” he said, while referring to the bureaucracy. “The hint about patrons of the PTI campaign has created a very difficult situation for us. What do you do if your support staff stops heeding directives?” he made a point.

“The power centres and the business circles are readjusting but they have yet to achieve a balance. This is also because of the baggage of the old mindset, which is focused on immediate gains instead of sustainable long-term goals,” lamented an expert.

“For democracy to deliver, the political system needs to evolve to correspond to the demands of the economy. At the same time, market reforms are critical to reorient a policy framework that fosters competition and rewards prudent risk-takers instead of rent-seekers,” a market observer said.

Speaking to journalists in Islamabad last Wednesday, the president of the Overseas Investors Chamber of Commerce and Industry, Asad S. Jafar, said the investor sentiment was badly affected by the political sit-ins in Islamabad, particularly when the perception travelled abroad that even key government offices had become inaccessible for a few days in late August.

“Perhaps the expectation gap also played a role.” He explained that the business and investor community had pinned high hopes with the PML-N government, and these had risen further with last year’s budget decisions. But then the government could not meet its pledges on the energy supply and ease of doing business.

Published in Dawn, Economic & Business, December 1st , 2014

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