Divisive politics and institutional frictions producing frequent hiccups continue to frustrate otherwise strenuous efforts to achieve long-term political and economic stability.
In case of recurring crises, external support works for a while but sometimes at cross purposes.
Like the initial signs of macroeconomic stability, there are early indications that a strong segment of power wielders seems to be realising that persisting problems confronting the political economy cannot to be allowed to aggravate for want of national consensus.
Ground realities are making inroads into the realm of policymaking in the same way (probably at a slower pace goaded by unforeseen political events) as they did in case of access to the International Monetary Fund (IMF) for a bailout.
First, the Council of Common Interests (CCI) was convened after 13 months on Dec 23 although it is constitutionally mandated to meet every three months in a bid to smoothen the working relationship between the federation and the provinces. No less important was the meeting between the prime minister and the Sindh chief minister on the sidelines of the CCI meeting in which they discussed problems related to Sindh.
This indicates that the PTI’s s central leadership is moving away from its position of formulating uplift programmes for the province on its own without consulting the sub-national government. Earlier, Prime Minister Khan avoided meeting Chief Minister Shah.
Since coming to power, the Khan government has tried to centralise provincial functions at the cost of fiscal federalism. Just two weeks ago, three provinces, including PTI-governed Punjab, protested against the “unauthorised and unconstitutional” transfer of their funds from the provincial consolidated fund maintained by the State Bank of Pakistan (SBP) to the central consolidated fund on advice of the Federal Board of Revenue (FBR).
Politics and economics cannot be separated and need to work in harmony to give the best outcome. To quote World Bank Director in Islamabad Illango Patchamuthu: “Pakistan is facing the challenge of lack of political consensus on the economic reforms agenda.”
The first review of the bailout programme released recently by the IMF says the absence of majority of the ruling party in the Senate may hinder the adoption of legislation needed for programme (reform) objectives, which could “jeopardise the availability of external financing”. The number of bills/ordinances in parliament continues to mount as the stiff adversarial positions adopted by the ruling party towards the opposition is holding up their approvals.
Fortunately, an effective segment of the authorities that matter is realising that things cannot be put right with a house divided against itself. That includes the problem of institutional divide. Following the conviction of retired General Musharraf on charges of treason by a special court, government spokesmen have said repeatedly that it would avoid a clash of institutions and follow the constitutional course to resolve issues arising from the court judgement. The core establishment is on board.
Parliamentary bills continue to mount as the government’s adversarial attitude towards the opposition is holding up their approvals
With a weak commitment to guiding federal democratic principles and egalitarian policies enshrined in the constitution, Pakistan runs the risk of turning into a rudderless ship as demonstrated by wayward passions emerging in unexpected quarters and persisting extremism among common citizens. Institutional harmony can be fostered by shared values that have perhaps prompted the Supreme Court’s verdict that the tenure of the army chief should be decided by parliament.
With arbitrary decision-making lacking consensus, external influences in politics and economics run deep. “The horse is ours, but its reins are with others,” says Umar, a poor plumber from northern Pakistan, struggling hard to make a living in the posh Defence area in Karachi.
Pakistan is stuck in the orbit of traditional influences that — at times and by coincidence — discourage the country from expanding trade and economic ties with other fast-growing economies or comparatively more developed Asian countries. Two recent examples to quote here are a pause in the China-Pakistan Economic Corridor (CPEC) and the U-turn on the participation in the Kuala Lumpur Summit. US sanctions against Teheran have long been a major impediment to bilateral trade and economic ties with Iran.
While consolidating ties with old trading partners and multilateral lenders may be of paramount importance in resolving fiscal and current account deficits, Pakistan cannot afford to ignore the growing protectionism worldwide and slacken its efforts to diversify its export destinations and investments.
Reliance on producing a few low value-added goods for fewer foreign markets has been a major hurdle in boosting exports. Over the last decade, latest Asian Development Bank (ADB) data shows, Pakistan lost its global market share by an average 1.45 per cent per annum.
Of course, it cannot be denied that sophisticated goods that are in demand in foreign markets need to be produced along with import substitution. To quote former finance secretary Waqar Masood Khan, “(The) industrial production slowdown means a loss of capacity for export. We can sell only what we produce.” Trying to cut imports at the cost of production and unemployment while suppressing domestic consumption is not a long-term solution. To quote a businessman, “We must earn dollars in order to buy foreign goods.”
Without a significant improvement in export earnings, the current account turned negative in November with a deficit of $319 billion compared to revised $70 million against the initial estimate of $90bn surplus in October despite a drastic cut in imports. Much of the build-up in foreign exchange reserves, currently at $10.9bn against $10.7bn in May 2018, is on account of borrowings and some foreign investment, including Rs1bn in government papers which, a financial analyst says, is at the cost of local business.
Pakistan is in the grip of de-industrialisation. Large-scale manufacturing, decelerating over the past three quarters, fell by 7.97pc in October, taking the average for July-October to 6.4pc. But the problem is not part of the IMF-approved programme as the Fund only provides balance-of-payments support.
Briefing the media in Islamabad on Dec 19, Mr Patchamuthu said the stabilisation programme is designed to reduce the twin deficits and the government “is doing just that”. It is fine at this stage. But Pakistan has had a stabilisation programme every five years in the past. It did a good job on stabilisation and always reduced the deficit by compressing economic activity. But he regretted that “Pakistan is very bad in undertaking structural reforms, which lead to a balance-of-payments crisis every two to three years.”
Published in Dawn, The Business and Finance Weekly, December 30th, 2019
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