The Pakistani electorate has provided Mian Nawaz Sharif a commanding lead in the National Assembly and a clear majority in the Punjab provincial assembly. In South Asian politics, incumbency is hardly ever rewarded. The fact that the Pakistan Peoples Party (PPP) really suffered a humiliating defeat is in keeping with this trend. The party was punished for its poor economic performance and even more for its very poor governance. Under its care, Pakistan not only saw the economy move into a long-term growth recession, it also led the country to being labeled as one of the most corrupt countries on earth.
On the other hand, the Punjab administration led by the Pakistan Muslim League -Nawaz was given a large mandate. The electorate clearly approved of what the administration led by Shahbaz Sharif did for the province. It also recognised that even though the federal government was not supportive of the provincial administration, Lahore ran the provincial economy to the people’s satisfaction.
The electorate accepted the future prime minister’s claim that Pakistan had sailed into a perfect storm as a result of the poor handling of the economy by the PPP-led government. The electorate bought this message and is putting the messenger back into office. He is expected to move — and move quickly — in four areas: steer the economy out of the stormy water in which it has been left; deal with the growing problem of domestic terrorism; continue with the development of the political order so that it gains the support of all regions and segments of society; and repair relations with the outside world. At this moment, economics should be at the centre of public policymaking.
The markets are expecting the government to move quickly in improving the management of the economy. On the first trading day after the election, the KSE-100 index rose by a staggering 329 points, reaching a record of 20,245. On the following day, it added another 230 points to reach 20,475. The market’s signal was clear: it expected quick action from the government and was placing its confidence that the new policymakers will prove equal to the task. By choosing a person to lead the Ministry of Finance before making any other appointment to the cabinet, the prime-minister-to-be has indicated the importance he is attaching to economic affairs.
The first priority for the new administration should aim to build the confidence of the community of investors, both domestic and foreign, in the country’s economy. As economists have argued for long, confidence about the future is an important determinant of performance. Before the elections, investor confidence had plummeted to the point that the share of national income that was ploughed back into the economy reached the lowest level in the past five decades. There was little capital being invested by foreign entities into the Pakistani economy. In fact, some of the firms that had been present in the country for a long time began to unwind their operations and move out. Domestic investors had also lost faith in the economy’s future. There was anecdotal evidence about capital flight from the country. Instead of risking their capital in domestic ventures, potential investors were prepared to accept much lower returns by placing their money abroad. The fact that the rupee had been sinking in value against foreign currencies, also created an incentive for keeping savings outside the country.
Restoring investors’ confidence, therefore, should be the new government’s highest priority. This raises the obvious question: how should this be done? The first issue the new policymakers will have to tackle is concerned with the management of foreign reserves. Pakistan owes large amounts of money to the International Monetary Fund (IMF). There has been a steady decline in the reserves available to the country to pay for the difference between export earnings and import expenditures and to service foreign loans. The latter includes the scheduled payments to the Fund. One solution will be to return to the IMF and ask for it to finance a new programme aimed at stabilising the economy.
The programme will have to be supported with the flow of IMF money, which is more than what is owed to the institution. It must also provide enough financial resources to keep the country solvent for at least a couple of years. This means a programme of the same size that was signed with the Fund in 2008. Would the IMF be prepared to do this, given Pakistan’s past record? The country has signed on to many Fund programmes but completed only a few. Before concluding another programme, the Fund will ask for the implementation of what in its language are called “prior actions”. These will undoubtedly include a significant reduction in the fiscal deficit, which in turn, would require major changes in tax policy and the system of tax collection; withdrawal of many subsidies that put a large burden on the government’s budget; reform of power tariffs; and reduction of the large deficits incurred by several state-owned enterprises. It is only after these actions have been taken, that the IMF staff will be able to take a new programme to its board of directors, which will look at it with great scepticism.
The other approach would be for the government to take a few months to develop a programme of its own and return to the Fund by the end of the year. I would favour the second approach.
Published in The Express Tribune, May 20th, 2013.
COMMENTS (7)
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"In South Asian politics, incumbency is hardly ever rewarded."
Not true about India. Incumbent UPA government was re-elcted in the center in 2009. NDA governments in Gujarat, Bihar and MP have been re-elected multiple times due to good governance.
"The other approach would be for the government to take a few months to develop a programme of its own and return to the Fund by the end of the year. I would favour the second approach. "
Three questions: 1) Is there a reason you do not favour tax reforms and reforms in energy sector - which is the first approach? 2) Can you define the contours of a 'homegrown program that would be acceptable to IMF which does not have elements of tax reform nd energy sector reforms? 3) Does Pakistan with SBP reserves less than 2 months imports have the luxury of waiting until year-end? Remember the balance of payment problems are no small contributor to the load-shedding issue by preventing import of adequate fuel to run the power plants at full capacity.
The writer's recommendation to approach the IMF with a home grown programme is interesting. The question though is would IMF agree to a programme that does not address the difficult questions of tax policy or PSE and power tariff reforms? It would be nice to know what a home grown programme acceptable to IMF would look like. One expects a column on priorities for economic measures to be a bit more insightful.
The expectations from PML(N) is naturally high, firstly on energy solution, better employment opportunity for the skilled/ unskilled labour force increased every year.Industrial sector is also looking for incentive to boost the production/ export. This will pose constraints before the government to introduce the tax reforms including broad basing it. Agriculture sector too will remain untouched for land reform and also tax reforms. So unless the govt. has sufficient revenue generation it can not solve the exiting problems of energy crisis, investment in Infrastructure and economic growth.The road ahead is full of thorns for PML(N) and they have to clean it one by one and how it is going to be done is not known .
The comments made by Roni are sound and important. Pakistani bureaucrats have the wrong mindset, of trying to compete with low-wage sweat-shop nations to attract "foreign investment", which they see as the salvation to the nation's ills. More important than foreign investment is to produce world beating products, in terms of quality and production efficiency. Do that by harnessing the 'Black economy' ie the funds generated by illegal practices, which are presently parked outside Pakistan. These funds would easily replace IMF loans, and at much more attractive terms, with far fewer strings. There are sufficient qualified engineers, designers etc in the worldwide Pakistani diaspora to man these startups. Competing with China, Vietnam, Bangladesh etc for sweatshop wages is a downward spiral...the cheapest wins. On the other hand, innovative and attractive products command premium prices. Taiwan, South Korea, Singapore, Germany & Switzerland are role models.
I am very curious to know how Pakistan will reduce its fiscal deficit. If that were so easy wouldn't it have done it the last time?
The truth is to reduce the deficit, you need to do massive cuts in spending. The only area where it can cut back is the defence, but no matter how big a mandate Shariff has got, that is just not possible.
If other subsidies are eliminated, the inflation will sky rocket(IMHO).
Pakistan will be back to square one after all this Drama of approaching the IMF.
People underestimate how big a contributor US aid was for the past 50 years. This is a very good example. China will not give a dime for Pakistan, as it fears Pakistan will never stop asking for more and will make it habit.
If Pakistan can have nukes, missiles and other toys, it can afford to pay its own bills.
The IMF and foreign aid must be stopped as Sharif and IK have talked about before elections. We have to stand on our own two feet. Moreover, no western institution should give a penny to a country which keeps its masses starved, illiterate, sick and other basic needs while maintaining a million man army and hundreds of WMD. There must be drastic cuts (real not transferring army pensions into civilian budget, etc.) in all defense extravagates. A country who can spend this kind of money on non productive sectors does not need any sympathy from the bad West.