Lingering Uncertainty

Spearhead Analysis – 10.08.2018

By Farrukh Karamat
Senior Research Coordinator, Spearhead Research

Nearing the 71st Independence Day of Pakistan, Nawaz Sharif and trio continue to languish in the Adiala prison, awaiting a hearing on their bail petition. The political bickering continues unabated, with the opposition trying to forge an unlikely alliance; and, the PTI garnering support to form a Government with ‘good’ and ‘credible’ people at the helm. In the past, during the time of the Islamabad Dharna (sit-in) by PTI, the case for the dismissal of Nawaz Sharif, and his ultimate imprisonment after the Avenfield trial, it was Pakistan that suffered the most out of neglect, misgovernance and a lingering sense of uncertainty. According to disclosures now being made in the media the real indictment of the last government rather than being linked to an Iqama should have been on much serious charges of widespread corruption, nepotism, potential murder, and gross misgovernance – factors that have inflicted immense damage on the economy and reputation of Pakistan. Once again, while there is a strong ray of hope that Imran Khan will bring about the miraculous improvement in all facets of life in Pakistan, that same lingering uncertainty is giving rise to often ‘malicious’ rumours and accusations. The ECP, Military and Judiciary are being maligned through an orchestrated campaign; and the political parties are doling out funds and resources to try and rope in the stragglers and get a majority. To what end, for the incoming government is not going to face a bed of roses, as there are gigantic problems facing Pakistan, which require disciplined and concerted efforts. The decisions will be difficult and tough to take, as well as accept, to set the right course. It is time to focus and move forward in a constructive manner, and it is time for the PTI to lead and not rule (as in the past) and for that the lingering uncertainty has to end.   

The rapidly declining economy, a result of years of neglect, misspending and misgovernance, has to be tackled on a priority basis. The million-dollar question is: Does PTI have the Plan and the People to salvage the situation?

Mr. Asad Umar, the person likely to be the Man-in-Charge of the much-awaited economic revival, has been rated as a top-notch Corporate leader with the ability to do just that. Time will tell how he is able to manage the bloated bureaucratic set-up; the negotiations with the multi-lateral agencies; the concessions and transparency of CPEC; and the relations with the business community to jump-start the engine of growth. In addition, it would be vital how Pakistan develops an effective regional network for trade to capitalize on the OBOR initiative and its strategic position.

While Imran Khan provided the broad contours of implementing the concept of an Islamic Welfare State, that is easier said than done for a population of close to 220 Million people – a population that is used to evading taxes. At a point in time when the Government faces record trade and current account deficits and is likely to need in excess of US$12 Billion in funding in the short-term, it is highly unlikely that those lending the funds would accede to requests for any kind of subsidies or dole-outs to the Public. Raising the amount of taxes is going to be another gargantuan task and not one that would bear results immediately, given the complexity of the system and the multiple tax tiers and jurisdictions. Pakistan is ranked as 147th out of 190 countries on the basis of Ease of Doing Business (Tradingeconomic.com) – as a result attracting Foreign Direct Investment is going to be another Herculean task, as the whole system requires a drastic overhaul.

As in the case of past governments, the likely scenario is going to be high levels of borrowing to raise the already heavy debt load of Pakistan. With constrained repayment capacity this will be an additional burden on the economy and unless the inflows are rapidly improved and outflows restricted, we could end up worsening an already worsened situation. It is surprising that the Nation is cheering a loan of US$2 Billion from the Chinese and further loans from the Islamic Development Bank. The need is for us to break the begging bowl and implement structural reforms to right the wrongs of the past – and one hopes that the PTI has a robust plan in place to do just that. This would entail not populist decisions to start with, but rather taking hard steps to bring about the changes and increase the revenue inflow and restrict the outflows.

So far, there has been limited clarity on how the incoming government would improve the current account deficit. Perhaps, it is too soon for them to lay all their cards on the table, but the options open to them are severely limited. In an economy with a strong middle class focused on consumerism there is strong demand and a lot of it is being satisfied through imports. At the same time the export base has remained restricted and that is for a reason – on the basis of competitiveness Pakistan is ranked 115th out of 137 nations (Tradingeconomics.com). Lifting the huge youth population bulge to make it productive, efficient and competitive requires enormous effort in terms of education, training, healthcare and social infrastructure improvements. This requires large amount of funding, something that is scarce in Pakistan at the moment.

The bleeding Public Sector Enterprises (PSE) are a huge burden on the national exchequer and efforts in the past to privatize these PSEs have proven to be difficult and have been marred with accusations of favoritism and corruption. Mr. Asad Umar has hinted at improving the performance of these institutions through induction of professional management, but that is easier said than done. The rot has set in so deep that perhaps a “Gamma Knife” is needed to rid the institutions of the mafias that have run them into the ground. They should expect vehement opposition from different quarters, as in the past, towards any efforts to privatize the PSEs.

Pakistan will have to seek funding and the International Monetary Fund (IMF) is the prime contender for providing that assistance. The United States has expressed its reservations; Pakistan is on the FATF Grey List; and the multilateral lending agencies are likely to ask for severe constraints and conditionalities. At this point Pakistan needs to establish dialogue and convince the powers to be of their plans, rather than putting forth populist and naïve media rhetoric of standing up to the United States, FATF or IMF. This is a time to carefully tread the path for the benefit of Pakistan and for establishing the credibility of the Government of Pakistan. If Pakistan is looking towards China or Saudi Arabia as alternatives to IMF, it should be clear that any such concessions by these countries would come at a high cost and not as a gift. Furthermore, such a move could have foreign policy implications as this could shift the balance in Pakistan towards these countries at the cost of losing lucrative markets in the United States and potentially the West. 

It is unfortunate that while the previous governments were berated by the PTI leadership for piling on tons of debt, there would be additional debt piled on to sustain the existing debt. That in itself is not bad, unless the government has realistic plans to then capitalize on the relief provided through this funding to improve the internal revenue generating capacity. Whether that will happen only time will tell.

For now, that lingering feeling of uncertainty pervades the economy, albeit with a ray of hope of better days to come. It is essential to minimize the distractions and concentrate on the task at hand and revitalize the economy. Perceived media popularity needs to be replaced by actual work on the ground that shows results. Once the leadership starts to lead and sets the path, things will start to automatically fall in place and the trivialities will be eliminated; and that dreaded feeling of lingering uncertainty will end. Pakistan has potential, and now more than ever before it has an opportunity to realise that potential.

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