THE amber lights were already flashing and now, with a change of prime ministers, the political uncertainty hanging over the economy has been exacerbated. The assessments of credit ratings agencies are not definitive, but a downward change tends to reflect investor skittishness based on similar assessments by IFIs and a country’s own financial institutions. Following the ouster of Nawaz Sharif, Moody’s Investors Service has warned: “If heightened political uncertainty and strife among the various branches of government disrupt the administration’s economic and fiscal agenda, macroeconomic stability and the government’s access to external finance could be impaired, weighing on Pakistan’s credit profile.” In July, Moody’s had affirmed Pakistan’s B3 rating and maintained a stable outlook — with important caveats. “Any material widening of the fiscal deficit, renewed weakening of the external payments position, loss of multilateral/bilateral financial support, or significant escalation in political tensions would also weigh on Pakistan’s credit profile,” it warned.

The problem for Pakistan is that the government continues to cling to a story of economic success and macro stability, while the consensus among economy watchers outside government is that Pakistan is on the verge of a familiar unravelling if urgent corrections are not made. The list of challenges is by now well known: pressure on the fiscal and external accounts; a build-up of circular debt in the power sector; an over-valued rupee; and CPEC projects creating potentially unsustainable debt liabilities. Mr Sharif, with his keen interest in road-building and electricity projects, had virtually turned over the handling of the economy to his finance minister, Ishaq Dar. Mr Dar used his carte blanche to gut financial institutions and regulators in a misguided quest to force unquestioned obedience to his economic prescriptions. The approach has only succeeded in leaving the country with weakened financial institutions at a time when the finance ministry needs some frank advice and genuine assistance in managing the tricky period ahead.

There is, however, at least a glimmer of hope. The new prime minister, Shahid Khaqan Abbasi, is an economic heavyweight in the context of the previous cabinet. Mr Abbasi’s potential successor, Shahbaz Sharif, is familiar with the CPEC projects and the electricity sector. If Mr Dar is given the finance portfolio again, his prescriptions should be challenged on merit and the prime minister should exert his influence to persuade Mr Dar to adjust course. Mr Abbasi has already warned that the revenue base is too narrow — a basic factor in the sustained and large fiscal deficit. Perhaps Mr Abbasi or the younger Sharif should also have the courage to address an overvalued rupee and policies that have allowed the external account to come under extreme pressure. Whatever path they choose — and the options are not many — it should be clear that business as usual is not an option. The government must not leave course correction to the caretaker or successor government.

Published in Dawn, August 3rd, 2017