111 510 510 libonline@riphah.edu.pk Contact

Elections and the economy

The people of Pakistan have made known their will through the ballot on May 11, 2013. The PML-N has emerged as the clear winner and will be able to form a stable government at the centre with support from independents and smaller parties. This is good for the economy, as a stable government is likely to succeed in stabilising the economy.

What are the immediate economic challenges that the PML-N government will be facing after taking charge of the state? Whether we like it or not, the economic prosperity of Pakistan is very much linked to peace and stability in Karachi. The economic condition of the country has reached a point where it cannot afford instability and violence in the major growth pole of the country. How to address the situation politically will be one of the biggest challenges of the PML-N government.

How to prevent Pakistan from defaulting on its external debt payment obligations in a couple of months will be another challenge for the new government. Pakistan’s foreign exchange reserves have depleted at a dangerous pace in less than two years.

In July 2011, the SBP’s foreign exchange reserves stood at $14.8 billion and by May 3, 2013, had declined to $6.8 billion. In other words, the country has lost $8.0 billion in reserves in less than two years. If we exclude the forward buying of the SBP ($2.6 billion) to prop up the rupee, the foreign exchange reserves, as of today, stand at around $4.2 billion. By end-June 2013, Pakistan will have to pay another $264 million to the IMF alone, which will reduce its reserves close to $4.0 billion.

Whether we like it or not, Pakistan has no option but to seek IMF assistance to prevent defaulting on its commitments. In all probability, Senator Ishaq Dar will head the finance ministry and will be leading the Pakistani side in negotiation with the IMF. He is fully aware of the challenges and will be able to negotiate an IMF programme effectively.

The third immediate challenge for the PML-N government would be to prepare a budget for the fiscal year 2013-14. Three important institutions, namely, the Ministry of Finance, the SBP and the Planning Commission have been severely weakened in the last five years. The new finance minister will have to assemble a good team, which will help him in preparing next year’s budget. Furthermore, the IMF programme will give a clear idea of external flows to finance fiscal deficit.

The fourth challenge for the new government would be to prepare a home-grown, broad-based economic reform agenda as soon as possible. This would help the new government to negotiate effectively with the IMF for a new programme. The international financial institutions, as well as friendly countries, would like to see fiscal reforms that include both tax system and tax administration reforms to mobilise additional resources on the one hand and expenditure reform on the other.

The restructuring and privatisation of bleeding PSEs and energy sector reforms are other components of the reform agenda. There are two ways to handle the PSEs: firstly the new government must restructure the organisation, inject more money, bring in successful corporate managers, appoint credible persons on the board of directors to run these institutions without any political interference and then privatise them in the next three to four years in a transparent manner. Second, it must privatise them outright and offload them from the budget. Privatisation of these institutions is high on the PML-N economic agenda, which is good and reassuring for all of us.

The energy sector reform is complex and multi-dimensional. It is clear that there are no capacity constraints in generating electricity in the country. The power sector crisis is more of a governance issue rather than the issue of a demand-supply gap. By improving governance and fixing the pricing of electricity, the power sector crisis can be minimised in the short-to-medium term. A targeted subsidy for power sector consumers can be launched while a general subsidy programme can be faded out gradually in a span of two to three years.

The new government may consider merging the Ministry of Water and Power and the Ministry of Petroleum and Natural Resources and establishing instead a ministry of energy. This will help the government to deal effectively with power sector reforms. The free electricity given to the employees of Wapda must be withdrawn forthwith. The new government may consider privatising the Discos in its tenure. Preference must be given to the use of gas for power generation rather than for transport purpose. Gas must be supplied only to the efficient power plants to produce more electricity with the same level of fuel.

Managing fiscal decentralisation will form the other critical reform agenda of the new government. There is a built-in ‘manufacturing defect’ in the new NFC Award and without addressing it, there will be no meaningful fiscal policy in the country. In the event of a new IMF programme, the federal government will not be able to achieve the agreed fiscal deficit target in the preference of the new NFC Award. There are many ways to address ‘manufacturing defects’. What is required is the will to address them.

The economic reform agenda must also include reforms in the central bank, investment climate and promoting inclusive and sustainable growth. Close interaction with the private sector – both domestic and foreign – will be vital in building the confidence of the market and its participants. A new beginning has been made. The PML-N has a relatively better and experienced team and is most likely to succeed in stabilising the economy. The people of Pakistan have given a mandate to the PML-N not just to head the country but also to steer the economy out of the mire and morass of economic attenuation.

The writer is principal and dean of NUST Business School, Islamabad. Email: ahkhan@nbs.edu.pk

Dr. Ashfaque H Khan, "Elections and the economy," The News. 2013-05-14.
Keywords: Economics , Government-Pakistan , Economic growth , Political process , NFC Award , Economic planning , State Bank-Pakistan , Foreign debts-Pakistan , Economic issues , Foreign exchange , National issues , Fiscal deficit , Electricity , Pakistan , Karachi , PMLN , SBP , IMF , PSEs , WAPDA , NFC