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Political uncertainty: The economic and social cost

Political, economic, and social turmoil is nothing new for Pakistan and its people. They have more or less learnt to live with the tumult as a part of life. For many in our part of the world political discussions and debates resulting out of turmoil is a source of amusement and a form of so called “intellectual stimulation” equally enjoyed by all segments of society whether at tea shops in bustling markets, under the shade of a pipel tree in villages or in the lavish drawing rooms of the wealthy. The arenas for these debates are also the TV talk shows where anchors and panellists try to compete with each other more on the strength of vocal cords than intellectual maturity and sagacity. The business world has also developed a great resilience against political turmoil. There are short lulls and then the businesses return to business as usual. These idiosyncrasies of Pakistani society are very difficult for the foreign media and people to comprehend, hence, a negative country perception prevails in the outside world.

The past one week of ‘freedom marches’ and ‘Jalsas’ of PTI and PAT provided a great opportunity to thousands of people to show camaraderie and blur the lines between the haves and have-nots of all ages and genders, and the politicians and leaders of both PTI and PAT came together to form a united front against the current political system. These national scale protests are acceptable as long as they are devoid of violence and destruction of public property. The responsibility for this falls equally on the politicians leading these protests and the government in power, which needs to demonstrate wisdom and tolerance within the ambits of the laws of the land. Apart from a few incidents, things have managed to remain calm. The overall mood of the political leaders and the crowd was more of festivity where people of all ages and both genders were seen dancing to the music from all cultures of Pakistan, on the stage and on the ground, signalling a message of gender and social class equality.

However, having spelled out some positive aspects, the political uncertainty engendered by this latest political turmoil has had its toll on the country’s economy. The last two weeks of political happenings in Pakistan is no exception. For the said period, traders claim the economy suffered a Rs 30 billion loss. Dar, the Finance Minister, stated that the sharp decline of the KSE index on account of political uncertainty early last week resulted in a loss of Rs 300 billion. Exporters claim that they are unable to accept orders due to uncertainty in exchange rate and loss of productivity resulting in an increase in cost of doing business while some claim that due to political uncertainty foreign buyers are reluctant to place orders. These are all valid arguments. However, it is rather difficult to put an accurate price tag on losses of businesses as most reports are based on estimates and hyperbolic assertions.

Nevertheless, there are some apparent ground realities. On Monday last week the KSE index, on the news of political un-certainty, fell by 1309 points recording a fall of 4.5%, the highest in a single session. Over the week, it recovered 846 points on institutional buying and support and ease in political tensions whereby the net fall by the close of business last Friday was 463 points, which translate to a net loss of 1.6%. Investors will remain cautious until political uncertainty lessens. The Rupee showed tendency to inch up but by and large managed to retain its position against the US Dollar and is expected to remain stable if the government continues to monitor and manage it closely.

The major damage that results from political instability is the negative perception of our economy that is projected to the world, which brings about a sharp decline in the appetite of foreign investors to invest in Pakistan. This ‘flight of capital’ is often times irreversible.

Foreign Direct Investors (FDI) have largely not returned back to Pakistan since 2007 when FDI touched a peak of USD 8 billion which largely supported the country’s GDP growth of over 7%, one of the highest in South Asia at the time. Thereafter it sharply declined and touched the bottom of USD 750 million in FY 2013-14, the lowest in the region, if not in the world. The trade volume over the last five years is almost stagnant with imports being USD 39.2 billion and exports at USD 23.2 billion in the FY2008-09 and correspondingly USD 40.7 billion and USD 25.2 billion in FY2013-14 with some small peaks and dips in between. The only positive trend noted is the increase in inward remittances, which grew from USD 8.9 billion in FY09 to USD 14.3 billion in FY14.

The period of 2008 to 2013 witnessed a fair degree of political harmony with PPP contented with Federal and Sindh governance and PMLN happy with Punjab governance while regional political parties also contended with the regional slots assigned to them. PTI was not on the map during this period but was in the process of establishing its support base. This period of political harmony did not spurn any significant turnaround in the country’s economy nor improved the life of its downtrodden people primarily on account of poor governance and massive corruption.

During the period 2008 to 2013, despite of political harmony, the FDI opted to stay of Pakistan primarily on account of unprecedented levels of institutionalised corruption in Pakistan at all levels of governance. The US, the Europeans and all OECD countries governed under the strict global rules of fair business practices and ethics have no appetite to operate in countries where corruption is so prevalent. They would rather leave the opportunities of business worth millions of dollars than be penalised by global regulators for billion of dollars. Strategic local investors also opted to keep their capital unemployed primarily for the same reasons.

The government of PML-N started out well on a promising note in May last year. There were positive signals from local and foreign investors to return to Pakistan. People were rejuvenated with hope for a better future. But hope soon turned to despair as crippling loadshedding continued and no significant improvement was seen in the governance of the country. They therefore have not been able to revive FDI or serious efforts of local investment. What they could manage though in the last one year is project financing mainly from the Chinese and Turkish financiers who managed to position themselves in the space vacated by the traditional European, Japanese, and OECD countries. The project loan starts with the project and evaporates by the end of the project. Unlike FDI, it does not contribute in providing long-term employment opportunities, contribution to GDP growth, taxation enhancement and not least of all the transfer of technology.

The government would have done well if it, in its first year of rule, consolidated its standing through exemplary governance and gained the public’s confidence. All the while, PTI has managed to establish itself well in the political arena as a third political force to reckon with.

As a consequence of the wrangling on the political front in the last two weeks it is certain that which ever way it concludes the life in the next few years to come will not be ‘life as usual’ for the government in power, the opposition, all political parties, the judiciary, the media, the bureaucracy, the establishment and the people of Pakistan. There will be new challenges. The performance and transparency of the government and the opposition will now remain in focus more so than ever before. Government in Power will have to deliver more then ever before and governance made transparent. Negotiations will probably soon yield an agreement that reaches some middle ground and so the current political turmoil will conclude, but, the political uncertainty will prevail which for economy is as bad as turmoil if not more.

(The writer is Chairman Avant Ventures and Former President OICCI and ABB-Asea Brown Boverei)

Farhat Ali, "Political uncertainty: The economic and social cost," Business recorder. 2014-08-20.
Keywords: Political science , Political issues , Political system , Economic crisis , Political leaders , Azadi march , Imran Khan , Tahirul Qadri , Pakistan , PTI , PAT