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No numbers game

May 23, 2013

SOME perplexing challenges await the incoming government. It’ll need every ounce of patience, every penny’s worth of wisdom scrapped from past experience to tackle things.

For one, the system that is about to be sworn in, with a PML-N government in the centre flanked by a Pakistan Tehreek-i-Insaf government in KP and a PPP one in Sindh is inherently unstable.

Everyone has a stake in the other’s failure, and everyone has a platform from where to hold the other’s stake hostage.

Consider for instance, the question of the National Finance Commission award and the Eighteenth Amendment. The provincial government machinery that the PTI and PPP will be assuming charge of is the most empowered and resource-rich that the country has ever seen.

The electorate has basically told these two parties to first prove their governance credentials in the province before asking for a national mandate. For the PPP, there is irony here: the same provincial government that they did so much to empower has now become their proving ground if they want to regain their stature as a national party.

For the PTI, the province of KP is the staging ground from where they need to launch their next bid for a national mandate. If they can make a difference to things in that province, and they have all the tools they need to do exactly that, then their bid for a national mandate in 2018 will carry some credibility.

But the biggest challenge belongs to Nawaz Sharif at the centre. For one, the politics of this new electoral map will be tricky, especially given the diminished fiscal space left for the government. Ironically, it will become Nawaz Sharif’s job to educate and wean Imran Khan into politics.

If early reports are to be believed, they’re struggling with the question of fiscal deficit already. The good news is that due attention is being given to the matter.

The bad news is that they’re unlikely to find much of a solution in the near term unless they drastically cut down the size of the federal government (which means few ministers) and aggressively get the provinces to live up to their obligations to deliver governance outcomes. Raising tax rates will help only marginally, because less than half the revenue thus generated will stay with the federal government after provincial shares have been deducted.

It’s possible they’ll eventually start to rely on non-tax measures to help bridge the deficit, but in the first year of their rule, the new government will struggle with the question of the deficit and the attendant borrowing and growth of the domestic debt. We’ll know they’re failing when we hear the finance minister complain about the NFC award and what it has done to the government’s fiscal situation.

The power crisis presents similar challenges. Like the fiscal deficit, it cannot be addressed without changing the structure of government. Merging ministries can take time, but they can start by giving the ministries of petroleum, water and power to the same individual.

We’ll know they’re failing to tackle the power crisis when we see them getting together to arrange emergency liquidity for PSO to pay for its next consignment of furnace oil. We’ll also know that failure is imminent when we see them announce conservation measures like early closure of shops and no air-conditioning in government offices — then fail to implement them.

A changed landscape awaits the new government. Previously, most banks were publicly owned and their assets were the government’s assets.

Now most of the country’s banks are in private hands, and given the enormous stakes that the banks have in the government’s fiscal affairs by virtue of being such massive lenders to the government means that the relationship between Islamabad and Chundrigar Road is a delicate one.

Of course it helps when some of the biggest banks are owned by people who are squarely in the party’s corner, but such relationships also bring reciprocal obligations that will constrain the government’s room for manoeuvre.

We’ll know they’re failing in their dealings with their creditors if we see interest rate cuts without fiscal reforms.

There is little or no excuse for not moving forward expeditiously with granting India MFN trading status. A fuller liberalisation of trade can follow; let’s remember that the grant of MFN status is the beginning, not the end point, of normalising trade ties.

Some within the PML-N are talking about ‘frameworks’ for peace and ‘non-tariff barriers’ which translated means they want to renegotiate some things before moving ahead with the MFN. Fair enough, that’s their prerogative; but we should look for an expeditious approach to the Indian leadership at the highest levels.

We’ll know they’re failing in their efforts to normalise things with India if the grant of MFN status is not made before end 2013.

The falling reserves are another important consideration. Now that the party has gone public with its intentions to avoid approaching the IMF at the outset, all eyes will need to be on their plans for arranging inflows.

A few positives on the external front: the outlook on oil prices is favourable to Pakistan, and only one year of heavy debt repayments is in the offing. Since debt repayments is the main reason why the country’s external position is weakening, we can look ahead to how things will fare after the two bulky payments due in August and November.

We’ll know they’re failing in their efforts to control the external account if they go asking Saudi Arabia for help.

A tough set of challenges awaits the new government, which in some cases requires fundamental structural reform. The good news is that this party has a track record of advancing reform. The bad news is that the political set-up in which they’ll be operating is a little more unstable than the parliamentary arithmetic would have you believe.

The writer is a Karachi-based journalist covering business and economic policy.

Twitter: @khurramhusain