THE new year has been rung in around the world in already a less than auspicious way. For Pakistan, 2016 may not have been entirely annus horribilis, with a few positive developments taking place with regard to the economy amid the negative ones, but it was far from being annus mirabilis either.

In fact, while the economy continued to remain stable, it refused to do much else. Hence, the economy did not move beyond stabilisation with either a large reform push by the government (barring a few notable attempts on the tax side), or by a breakout in exports or private investment. The agricultural sector remained under stress too.

Worryingly, but quite predictably as well, many of the gains from macroeconomic stabilisation are also proving to be fleeting. With the completion of the IMF programme at the end of September last year, the government’s fiscal position has begun unravelling, with slower growth in tax receipts and larger haemorrhaging in public-sector enterprises leading to a surge in budgetary borrowing. In a development that should evoke the greatest concern on the fiscal side is confirmation of how far public finances have sunk into a debt trap. For the first quarter of the current fiscal year, interest payments (Rs414 billion) have exceeded net revenue receipts (Rs369bn).

This economic backdrop from 2016 is being carried forward into 2017 — with some additional twists. First, the environment for the global economy, especially for emerging markets, remains highly uncertain and quite possibly non-benign. The continuing strength of the US dollar amid prospects for a longish cycle of interest rate hikes in the US means investors have pulled funds away from riskier assets, especially from emerging markets. This will make it even harder for the government to pursue its strategy of borrowing from international capital markets to bridge the ever-rising foreign exchange requirement.

The year 2017 is likely to be another turbulent one.

Second, global oil prices have climbed strongly in the past few months, with Brent crude futures surging 36 per cent since August. With Opec output cuts going into effect, and geopolitical tensions on the horizon in the Middle East and Gulf as well as the South China Sea, oil prices could spike even further from here. While in the medium term, rising oil prices will catalyse a supply response from US shale producers, there are enough potential wild cards in play (such as a reimposition of US sanctions on Iran, among others) to keep prices of this key commodity, and of the entire energy complex, firm.

Higher energy prices will raise the discomfort level for Pakistani authorities as it will add to the stress on the external account. The other source of pressure will be the continuation of a non-favourable environment for Pakistan’s exports. While the world economy, in aggregate, has been on the mend, world trade has so far recorded one of its weakest recoveries, with the divergence between global GDP and trade growth at historically high levels. Clouding the outlook further is the high degree of uncertainty introduced by Donald Trump’s aggressive stance against China, in particular, and his revealed ‘nativist’ and protectionist impulses in general. The global economy, and hence world trade, are unlikely to recover without a recovery in China and the continuation of stable, predictable policies by major economic players with a commitment to globalisation.

Perhaps the most important twist to the economic environment will be the higher degree of intersection between the economy and politics. Politics is already exerting an influence in economic policymaking, with the deferment of privatisation or of increases in domestic petroleum prices, among other ways. However, this imprint will increase further as the election cycle intensifies and enters its home stretch. The IMF-inspired reform agenda of the PML-N government has already been placed on the back burner since the completion of the Fund programme, and will be fully consigned to the bin from here on for whatever it was worth.

Other than the election cycle, the dynamic of the ongoing Panama Papers case will also cast a shadow on the economy irrespective of its outcome, more so if any potential Supreme Court verdict leads to public protests. Given this political trajectory, a further potential blow to public finances can be dealt by the fact that the bargaining power of special interests will rise just as that of the PML-N government will wane, most likely leading to more ‘negotiations’ and fiscal handouts. Irrespective of external political pressures, a far-reaching self-inflicted blow, among others, to the institutional framework has already been dealt by the government by the move to place the hitherto independent regulatory authorities under the ministries they are supposed to be regulating. This is a major reversal of the reforms process put in place in the mid-2000s.

A final twist can come from a familiar source, but in a possibly unexpected manner. Narendra Modi’s loss of domestic political capital with the demonetisation fiasco could make him even more desperate and aggressive with regard to Pakistan, thus clouding the investment outlook for both countries. India’s irresponsible actions under the current BJP government are not just jeopardising peace prospects in the near term, but by threatening to dismantle bilateral and regional frameworks, could threaten the region’s stability and security for decades to come. Geopolitics can provide another potential source of stress — Donald Trump’s policies and actions as president with regard to Pakistan.

However, the one piece of good news on the horizon in 2017, both for the economy as well as for the government, will be that investments under CPEC are likely to intensify and become more visible. Beyond that, the economy is likely to find it difficult to break out from its current equilibrium.

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

Published in Dawn, January 6th, 2017