WHILE much of the focus of political leaders remains on the daily hurly -burly of politics, it is the fate of the economy that will determine the country’s future. A precarious economy needs to be swiftly stabilised before it plunges into an uncontrollable crisis. This urges the need for responsible economic management and efforts to calm down the volatile state of confrontational politics. Unsettled politics is feeding into the deteriorating economic situation. But the delay in taking necessary economic measures is exacting a bigger cost. Uncertainty about elections is also making markets edgy.
Both the urgent — averting a financial crisis — and the important — ensuring a degree of political calm — have to be simultaneously tackled as they are interlinked. This challenge has to be met in a domestic setting of sharp polarisation and in a worsening global economic environment. The PML-N-led coalition government has declared its intention to continue in office until the National Assembly completes its full term in August 2023. But this is easier said than done. The ‘unity’ government has a razor-thin majority. It depends for its survival on a diverse group of parties, who have to be kept in line by constantly meeting their demands. A majority so slim that a few members can tilt the balance will oblige Prime Minister Shehbaz Sharif to perpetually look over his shoulder to his allies. This in turn could distract him from governance. It also makes taking and implementing tough economic measures difficult as that will require building consensus among coalition partners, despite their assurances of support for such action. And this when Imran Khan is mounting pressure for early elections. He has already threatened a ‘long march’ on Islamabad and a sit-in if his demand for elections is not met.
Meanwhile, Punjab has been thrown into greater disarray by the Supreme Court ruling on Article 63-A of the Constitution that votes of dissident lawmakers cannot be counted if cast in violation of their party position. The Election Commission followed with the decision to de-seat the defecting legislators who had voted for Hamza Shehbaz as chief minister. This has upended Hamza’s government and may usher in a period of instability.
PTI has already moved the Lahore High Court for his removal. Although Hamza has refused to step down, a fresh election of the chief minister is likely. PML-N and the PML-Q/PTI alliance are again locked in fierce competition for chief ministership. When a fresh election is called, if neither side is able to demonstrate a majority after two rounds of voting, the provincial assembly will stand dissolved. Even if PML-N is able to squeak through in a run-off election, it would be a fragile government. With the country’s largest province and political heartland mired in uncertainty, this has implications for the stability of the federal government. Already Punjab has been in a state of paralysis for close to two months.
More consequential is the precarious state of the economy. Virtually all macroeconomic indicators point to significant worsening of the economy: rising budget deficit, record current account deficit, dwindling foreign exchange reserves, soaring double-digit inflation, mounting debt, growing losses in state-owned enterprises, heavy government borrowing from the central bank and commercial banks, declining investment, and a deeply ailing energy sector that continues to stretch government resources and impose the burden of loadshedding on the public. Meanwhile, the fuel subsidy the previous government announced in its closing days is costing the exchequer over $600 million a month.
Political courage and policy actions are needed to avert an economic crisis.
It is the country’s perilous external position and balance-of-payments crisis that has pushed the economy to the brink. The current account deficit in the ongoing fiscal year is at a record high of $15 billion. Pakistan’s immediate financing requirements this fiscal year are about $5bn — $3bn for the current account gap and $2bn for debt repayments due by June 30. Financing needs next year are estimated to be around $21bn to meet just debt obligations. Foreign exchange reserves are now down to $10bn, which cover just six weeks of imports. As the reserve cushion has depleted so has confidence. This has put more pressure on the balance of payments and sent the rupee into freefall. Its value has sunk to a historic low against the dollar, depreciating by almost 20 per cent in just the past six months. Last week the rupee crossed a psychological barrier by trading at Rs200 to a dollar. This adds significantly to Pakistan’s debt.
Meanwhile, negotiations between the government and the IMF are underway in Doha on resumption of the suspended loan programme. Its revival is necessary for the country to access urgently needed funds not just from the IMF but also other multilateral institutions and bilateral donors. For example, the rollover of a Chinese loan awaits finalisation of the Fund programme. So does Saudi financing. The IMF’s prior condition for resuming the programme is for the government to withdraw the fuel and electricity subsidy. While talks continue, Finance Minister Miftah Ismail is reported to have conveyed to the Fund team “the government’s commitment to undertake reforms envisaged under the programme and to complete the structural benchmarks”. He is expected to join the talks in Qatar this week to try to finalise the package. Why bailout negotiations are taking place in a third country is however beyond comprehension.
If and when the IMF deal is done the government will have to take the tough economic steps it has promised, ensure compliance and also manage their political fallout. Although the prime minister apparently has the support of all coalition partners for this, it will require deft political handling in the face of the anticipated public backlash. Imran Khan will be more than ready to exploit this situation. So political will to stay the course on economic adjustment will be needed. The situation demands courage, wisdom and skill on the part of leadership to deal with the unprecedented economic and political challenges. Otherwise, it is the people of Pakistan who will have to pay the price for policy inaction.
The writer is a former ambassador to the US, UK & UN.
Published in Dawn, May 23rd, 2022