Whether the next government will be able to fix critical economic issues and accelerate growth is something that analysts will continue to debate.
Much would depend on whether a better version of the democratic system built upon the strength of institutions emerges after the upcoming elections.
Apart from confronting domestic challenges of governance and civil-military relationship, tackling regional and global powers that are hostile to the China-Pakistan Economic Corridor (CPEC) and adjusting the national position vis-à-vis the US-China trade war will require both wisdom and nerves to boost the economy.
Laced with promises of building the economy, manifestos of the two major political parties — the PPP and the PML-N — are out now. Imran Khan of the Pakistan Tehreek-i-Insaf (PTI) has outlined an ambitious 11-point plan for reforming the economy. But a formal party manifesto was not launched until July 6.
Even a cursory look at the 2018 manifestos of the PPP and the PML-N is enough to make one believe that economic progress will accelerate if either of them comes into power. The same cannot be said about the PTI as the party has yet to present before the nation its detailed economic programme.
It is of immense interest for banks to know which political party would tighten the fiscal belt quicker than others because that would have a direct bearing on their business
In general terms though, the PTI has talked about boosting the economy in multiple ways. It has put more emphasis on fighting corruption. From initiating mega housing schemes to bringing about an agricultural revolution, pursuing energy sector reforms, restructuring state-owned enterprises, reinvigorating trade and industry and developing natural resources, there is a long list of promises in the manifestos of the PPP and the PML-N. Some of these promises are also included in Mr Khan’s 11-point agenda.
Each one of these promises is lucrative enough from the bankers’ point of view. After all, delivering on every promise should require banks to play a proactive role. That certainly means more business opportunities, higher revenues and fatter bank profits. The PML-N manifesto even talks about “providing financial markets a boost” and “fostering a culture of innovation and competitive advantage”.
“Our government would actively facilitate business-to-business linkages between the Chinese financial sector, Chinese industries and Pakistani entrepreneurs,” boasts the party manifesto, adding that “The availability of risk capital for new businesses creation would be assured in coordination with the Chinese government and banks.”
These are big promises capable of creating lots of opportunities for banks and development finance companies.
But bankers are very practical, pragmatic people. They keep their eyes fixed on the bottom line. They know that words, however fanciful and promising, cannot help them do better and make more money. “It is the fulfilment of those words and fuller implementation of the given programmes that can impact the overall economy and the banking sector,” said the head of one of the top five banks.
For banks, perhaps the most essential question is which party has the finest plan for improving fiscal management and whether it has the spine to implement that plan. Most economic ills originate from fiscal mismanagement. Once fiscal imbalances start taking a toll on the economy, banking institutions also feel the heat. Similarly, a slower pace and the poorer quality of economic growth have a negative effect on sustainable growth of the financial sector. Another important thing for banks is to know which political party can be expected to give more autonomy to the central bank and spare the financial system unnecessary involvement of fiscal authorities in monetary matters. But sadly, the manifestos don’t offer substantial hints about it.
Similarly, it is of immense interest for banks to know which political party would tighten the fiscal belt quicker than others because that would have a direct bearing on their business.
During the past decade, excessive government borrowing from banks has perhaps done more harm than good to the economy by crowding out the private sector. But it has also remained a constant source of interest income for banks via zero-risk investment in government securities.
Keeping these points in mind, scanning the economic sections of the manifestos of the PPP and the PML N as well as broader economic uplift promises by the PTI can be very helpful.
All these parties, for example, have talked about launching big housing schemes and revolutionising agriculture. “Unless the next government delivers on these two promises, how can banks benefit by lending more to housing and agriculture sectors?” said a senior executive of Habib Bank. “If the party in power can honestly pursue its manifesto plans, banks happily cooperate with it as long as their participation in the implementation of those plans makes sense.”
Sensing a growing demand for qualitative improvement in public life, political parties have also incorporated in their manifestos new plans for enhanced service delivery in social sectors, like health, education and women and youth empowerment.
Combine this with the talks about promoting small and medium enterprises (SMEs) and exploiting economic potential of the CPEC, and you get a picture of how banks can benefit in many ways if the next government fulfils its electoral promises.
All this means banks will have enough opportunities for new and possibly huge project and trade financing, consumer lending and investment and banking advisory businesses, senior bankers say. But many of them doubt the ability of the three key political parties when it comes to fulfilling their promises.
After the elections are over, top bankers will be analysing the post-poll political situation for forecasting various scenarios that can emerge following the rise to power of a particular party or the formation of a coalition government. Bankers say the purpose of conducting such in-house exercises is to perceive the economic and market environment, assess peculiar risks and position their institutions accordingly.
The exchange rate should be left to find its own level, so that central bank reserves are used only to smooth daily fluctuations rather than to defend a particular rate.
Tandem adjustment in interest rates will be warranted to counter the inflationary impact of rising international energy prices and a weaker rupee.
Talks with the IMF must commence post-haste; anticipated withdrawal of quantitative easing has already led to rising costs for emerging-market sovereign debt, and further commercial debt is undesirable.
Administered prices have led to excess wheat and sugar stocks. These must be offloaded at current world prices. The holding cost of these stocks simply adds to the eventual loss the country will have to absorb.
There are export promotion incentive schemes, which have not been fully implemented. These should be implemented.
The refund of dues from the FBR and other government entities to export houses should be ensured.
The government should diversify exports by including items such as halal food, mining and medical research services. IT services should be streamlined for exports. The export of value-added goods, rather than just raw material, should be promoted.
It should encourage export industries and import substitute items. The emphasis should be on export-driven growth prospects rather than domestic consumption-led growth.
Published in Dawn, The Business and Finance Weekly, July 9th, 2018