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Economic costs of politicking

The present political crisis will sooner or later be over in one way or the other, but there is a heavy economic cost to be borne due to the egotistic and self-centred adventures of our political leaders. The economy was already in intensive care being sustained by foreign resources collected by begging and borrowing. In the aftermath of recent political developments, it will become more weak and vulnerable and difficult to manage.

Every patriotic Pakistani should be deeply concerned about the state of the economy and do everything possible to help it get out of its crisis. However, it is frightening to see that those who are supposed to lead the country are taking the economy into a deeper crisis in their blind pursuit of personal agendas. Politicians do not even seem to care about what will happen to the economy if street demonstrations and political manoeuvrings continue or intensify.

The crisis has already adversely affected revenue collection, government expenditure, flow of trade, prices, reserve position of the State Bank of Pakistan (SBP) and the foreign exchange market. The fourth review of the EFF arrangement could not be completed in the backdrop of the political crisis and it will, at a minimum, delay the disbursement of the next tranche by the IMF. Disbursement of loans by multilateral and bilateral sources linked with the IMF programme may also be in jeopardy. Foreign investment, which was already shying away from Pakistan, may decline further. Export growth may slow down and remittances may be adversely affected.

In the coming months, the balance of payments will remain under stress. It will manifest itself in a further decline in foreign exchange reserves of the SBP and more depreciation of the nominal exchange rate. Although a foreign exchange crisis may not be imminent, the balance of payments will be moving in the wrong direction.

The budgetary situation is bound to worsen in the context of difficulties in revenue collection, delayed receipt of foreign budgetary support, and rising expenditure on defense and security. For FY15, tax revenue will be lower than projected not only because of disruption of trade and economic activity, but also due to the government’s inability to take measures to expand the income tax base, impose a generalised consumption tax, improve tax administration and reduce tax corruption.

On the expenditure side, pressures will build up to increase it. Debt servicing liabilities and defence expenditure will increase. There will also be a temptation to increase rather than decrease the amount to be spent on price subsidies. Price pass through of higher cost of electricity, gas and petroleum products will face strong public resistance. Restructuring of loss-making public sector enterprises would be delayed and a weak government may not be able to privatise them at a fast rate to minimise losses to the budget and generate privatisation proceeds to finance the budget.

A widening budget deficit is likely to be covered by larger domestic bank borrowing. If this borrowing is undertaken from the SBP, it will fuel inflation further and also put more pressure on the nominal exchange rate. If commercial banks are used for borrowing, it will crowd out the private sector, further slow down the rate of domestically-financed investment and add to inflationary pressures. In any case, public debt is bound to rise sharply and debt management will become increasingly more difficult. If the PML-N government remains in power, it is likely to continue to pursue prestige projects even in the context of shrinking resource availability – which would only add to the budgetary difficulties.

Rising inflation with slowdown of investment and economic activities will make the lives of low-income groups, particularly daily wage earners, more miserable. Income inequality and poverty will accentuate adding to social and political unrest.

There will also be severe long-term economic implications of the recent political unrest. The increased political instability and eroded government writ are bound to weaken the government’s ability and will to undertake difficult structural policy reforms that are so vitally needed. In this context the PML-N government would not be inclined to undertake any tax reforms that would hurt vested interest groups – landlords, business community and operators in the service sector and underground economy.

The resistance of the PPP to privatisation of public sector enterprises will become more effective as the PML-N government owes much to the clever moves of Asif Zardari and his support to Nawaz Sharif to maintain the status quo, which suits him. The only easy way left for the government to finance public sector operations will be increased reliance on bank borrowing. But such an approach will have its own cost in the form of higher prices and inability of the government to meet the quantitative targets of the IMF programme.

It may become increasingly more difficult for the government to meet the IMF conditionality for structural reforms as well. With its previous outstanding debt declining sharply with repayments due to be completed in the next few months, the IMF may find it to its advantage to stop new EFF disbursements under the cover of the inability of the government to meet the Fund conditionality. This will be in sharp contrast to the past IMF practice of waivers for the breach of conditionality.

The irony is that the government got into this situation, not because of unpopular economic policy decisions but because of a cavalier attitude towards governance and internal security and lack of respect for the fundamental rights of citizens.

There is no doubt that the PML-N government had inherited a vulnerable economy reflecting poor budget management, precarious balance of payments situation, excessive internal and external borrowing, and a high rate of inflation, a low rate of economic growth and rising unemployment and poverty. It was a precarious economic situation and the PML-N had promised to address the deep-rooted economic problems on an urgent basis after coming to power, committing itself to tough policy measures in managing the economy to break the begging and borrowing bowl.

However, instead of initiating fundamental budgetary and balance of payments reforms in consultation with other stakeholders soon after coming into power to put the economy on sound footing, the PML-N government adopted an economic management approach similar to that of the PPP-led government. It decided to sustain the fundamentally sick economy by relying on foreign begging and borrowing and playing it safe politically.

The main reason was to avoid confrontation with powerful vested interest groups who would have been adversely affected by structural policy reforms. Driven by political expediency and short-sightedness, the government decided not to take the risk of giving an opportunity to the opposition parties to take advantage of the unpopularity of, and resistance to, policy reforms. Statesmanship was required to take political risks for the sake of the country – and it was nowhere to be found.

Missteps have landed the government in a more difficult political situation. A vulnerable and weak government will be unable to undertake economic policy reforms that are so critically needed to pull the economy out of the state of stagflation.

The price for the arrogance/ego of political leaders will be paid by the poor and lower-income groups in the form of higher prices, loss of opportunity to earn daily income, rising debt to be repaid by future generations, little hope of economic revival and lowering of the rate of inflation in the foreseeable future.

The writer is a former governor of the State Bank of Pakistan. Email: doctoryaqub@hotmail.com

Dr. Muhammad Yaqub, "Economic costs of politicking," The News. 2014-08-27.
Keywords: Economics , Economic policy , Economic issues , Foreign exchange , Foreign reserves , Exchange rate , Political crisis , Electricity crisis , Economic inflation , Budget deficit , Political leaders , Income Tax , Tax revenue , State Bank-Pakistan , Government-Pakistan , Economy-Pakistan , Politicians , Exports , PM Nawaz Sharif , Asif Zardari , Pakistan , PMLN , SBP , IMF , EFF , PPP , BoP