When pol­i­tics clashes with eco­nom­ics

The Pak Banker - - Front Page -

ALTHOUGH par­lia­ment will be com­plet­ing its full term in a few months time, the government is still re­luc­tant to an­nounce a date for gen­eral elec­tions. The avoid­able un­cer­tainty is ex­act­ing a heavy eco­nomic price, by de­lay­ing ur­gent pol­icy de­ci­sions that are needed to avoid a full-blown eco­nomic cri­sis. The dan­ger of such a cri­sis is height­ened by of­fi­cial in­ac­tion on both in­ter­nal and ex­ter­nal di­men­sions of the coun­try’s wors­en­ing fi­nan­cial po­si­tion.

Government lead­ers have been send­ing mixed sig­nals on the tim­ing for the gen­eral elec­tion. At times they have hinted at elec­tions by March 2013. On other oc­ca­sions, in leaks and am­bigu­ous state­ments to the me­dia, they have in­di­cated that polls might be held in April or May.

This po­lit­i­cal pos­tur­ing has a twofold aim. Keep po­lit­i­cal ri­vals guess­ing and off bal­ance. And use the poll date as a bar­gain­ing tac­tic in on­a­gain, off-again talks with the op­po­si­tion on a care­taker ad­min­is­tra­tion that the government is con­sti­tu­tion­ally ob­li­gated to in­stall by agree­ment.

Op­po­si­tion leader Nawaz Sharif has oc­ca­sion­ally ques­tioned this ap­proach. But he has stopped short of press­ing for an im­me­di­ate elec­tion date, con­fi­dent per­haps that, when­ever they are held, the elec­tions are his to win. The other par­ties in the rul­ing coali­tion want to be in the cor­ri­dors of power as long as they can and there­fore have lit­tle in­cen­tive to call for an ear­lier poll.

In any par­lia­men­tary sys­tem de­ter­min­ing the elec­tion tim­ing is the pre­rog­a­tive of the party in power, which al­most al­ways uses this to its po­lit­i­cal ad­van­tage. But rarely does a government con­stantly dance around the tim­ing in the way the PPP-led coali­tion has done, spread­ing de­lib­er­ate con­fu­sion and un­cer­tainty about the date. At one point it even in­sti­gated me­dia spec­u­la­tion that elec­tions could be post­poned. This is de­spite the fact that when par­lia­ment’s con­sti­tu­tional ten­ure ends in March 2013 gen­eral elec­tions have to be held within sixty days of the as­sem­blies’ dis­so­lu­tion.

The government has cho­sen to ob­fus­cate the poll date at a time of grow­ing dis­ar­ray in the coun­try – con­di­tions that re­quire a government em­pow­ered by a fresh man­date to pro­vide lead­er­ship and chart a new di­rec­tion. Last week’s sec­tar­ian and mil­i­tant at­tacks were the lat­est re­minder of the break­down of law and or­der across the coun­try. Karachi’s unchecked de­scent into law­less­ness, col­lapse of government author­ity in Balochis­tan and the grow­ing fis­cal and eco­nomic crises are all a con­se­quence of the lack of gover- nance and a rud­der­less ship of state. This dire sit­u­a­tion un­der­scores the need for a fresh man­date from the elec­torate, so that the next government can move de­ci­sively on a num­ber of press­ing is­sues. The re­form-shy PPP government has long avoided tak­ing tough de­ci­sions. It now cites the ap­proach­ing elec­tion as its lat­est al­ibi for shirk­ing se­ri­ous pol­icy ac­tions. This means that in the pe­riod lead­ing up to the elec­tions, the rul­ing coali­tion will hold of­fice but take no pol­icy de­ci­sions, en­gage in pol­i­tick­ing not prob­lem solv­ing and jus­tify in­ac­tion by its pre­oc­cu­pa­tion with elec­tion­eer­ing. The cur­rent dis­ar­ray can there­fore be ex­pected to con­tinue.

In this back­drop, un­pre­dictabil­ity about the elec­tion tim­ing may serve the rul­ing party’s pur­pose, but not the in­ter­ests of the coun­try. Nowhere is this more ev­i­dent than on the eco­nomic front. De­lay in in­sti­tut­ing cor­rec­tive mea­sures to ad­dress the wors­en­ing bud­get and bal­ance of pay­ments deficits in­creas­ingly risks push­ing the econ­omy over the edge.

The up­com­ing visit to Washington by the government’s eco­nomic team may be a mea­sure of its des­per­a­tion to raise much needed re­sources (by seek­ing US pay­ment of coali­tion sup­port funds), hav­ing failed to at­tract ex­ter­nal fi­nanc­ing so far. But such bowl-in­hand di­plo­macy may have al­ready run its course. The coun­try’s fi­nanc­ing re­quire­ments are now too size­able to be met by this kind of ad hoc eco­nomic man­age­ment. The patch­work ap­proach pur­sued by the government has al­ready left pub­lic fi­nances in a pre­car­i­ous state. This is be­ing ag­gra­vated by a num­ber of dis­turb­ing trends, which show no sign of be­ing re­versed: a run­away fis­cal deficit that could rise be­yond the 2008 level, plum­met­ing domestic and for­eign in­vest­ment, record bor­row­ing from the State Bank and com­mer­cial banks and high in­fla­tion. Ad­di­tion­ally, heavy en­ergy sub­si­dies and in­creas­ing in­ter­a­gency debt con­tinue to fuel the un­re­solved en­ergy cri­sis.

Com­pound­ing this per­ilous sit­u­a­tion are ris­ing losses in pub­lic sec­tor en­ter­prises that are drain­ing government re­sources. Fis­cal de­cen­tral­i­sa­tion un­der the new rev­enue shar­ing for­mula, with­out re­cip­ro­cal pro­vin­cial com­mit­ments to gen­er­ate re­sources or re­strain spend­ing, has also in­ten­si­fied strains on the over­all bud­getary po­si­tion. On top of this, the government’s fis­cal lax­ity in the run up to elec­tions is sap­ping pub­lic fi­nances. The in­crease in the sup­port price of wheat an­nounced last week is an ob­vi­ous at­tempt to woo the ru­ral vote. Mean­while the coun­try’s ex­ter­nal ac­count is close to the tip­ping point. Ex­ports are stag­nat­ing and for­eign di­rect in­vest­ment has plunged to a record low. Large ex­ter­nal debt ser­vice pay­ments, in­clud­ing to the IMF, have been steadily de­plet­ing the coun­try’s for­eign ex­change re­serves. This has put pres­sure on the ru­pee with its value sink­ing to a record low against the dol­lar.

Re­fer­ring to Pak­istan’s weak­en­ing ex­ter­nal po­si­tion, a vis­it­ing IMF del­e­ga­tion in Oc­to­ber called for “de­ci­sive” ac­tion to ad­dress what it called a “chal­leng­ing out­look”. A Fund staff report is­sued ear­lier this year was more ex­plicit. It said that the government’s pol­icy mix was “lead­ing the econ­omy down an un­sus­tain­able and risky path.” And it warned that Pak­istan could face size­able fi­nanc­ing gaps as the in­ter­na­tional re­serve cush­ion be­gan to erode due to the wi­den­ing cur­rent ac­count deficit and re­pay­ments to the IMF.

That moment of vul­ner­a­bil­ity is ap­proach­ing. The coun­try’s econ­omy has lit­tle re­silience to with­stand a shock from any ad­verse in­ter­na­tional or domestic devel­op­ment. Even with­out such a shock a dire out­come ap­pears likely. With for­eign cap­i­tal in­flows dry­ing up and ex­ter­nal li­a­bil­i­ties loom­ing, Pak­istan is on the brink of a sit­u­a­tion where it would be un­able to meet its fi­nanc­ing re­quire­ments de­spite strong overseas re­mit­tances. Re­pay­ments of $605 mil­lion are due to the IMF this month and $704 mil­lion in Jan­uary-Fe­bru­ary.

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