EDITORIAL: The deal between Pakistan Muslim league-Nawaz (PML-N) and Pakistan People’s Party Parliamentarians (PPPP) struck at midnight Tuesday alleviates political uncertainty that had prevailed since the 8th February election results began to be announced.
While the deal does not forestall the possibility of a logjam during parliament proceedings on critical matters given that the Leader of the House would not only have to take along all coalition partners with markedly different political narratives but also a party (PPPP) not sitting on the treasury benches whose support would be vital to show a majority for the passage of legislation and the budget.
Additionally, a major source of concern for the treasury benches would no doubt be to defuse frequent disruptions by the party most likely to elect the leader of the opposition in the House, notably the Sunni Ittehad Council joined by 82 elected candidates backed by Pakistan Tehreek-e-Insaf (PTI).
Thus, the road to implementing politically challenging economic reforms will not only be considered extremely rocky from the perspective of multilaterals and bilaterals, though firm support of the establishment for the reform agenda so far has ensured no derailment of the agreed reform agenda under the Stand-By Arrangement (SBA) to date, but of far greater concern to all stakeholders is the possibility of the general public refusing to accept the sustained erosion of the value of each rupee earned on a weekly basis, the sensitive price index was a high of 34.25 percent for the week ending 15 February 2024 year on year, that may lead to widespread protests which, if backed by political parties, may be difficult to contain without the use of extreme force that, in itself, contains the seeds of widening the ambit of protests.
Public discontent is therefore a looming threat which was ignored in the first review documents uploaded on the International Monetary Fund (IMF) website under the ongoing SBA last month as the caretaker setup remained focused exclusively on meeting the budgeted targets agreed with the Fund by the previous government.
Interestingly both, the SBA first review report and Fitch (in its comments on 18 February 2024), referred to vested or entrenched interests that could derail any subsequent programme negotiated with the IMF and not on the possibility of street protests against the administrative measures agreed with the Fund (upping the electricity charges and raising revenue through higher indirect taxes whose incidence on the poor is greater than on the rich).
Be that as it may, the deal between the PML-N and the PPPP will help improve business sentiments, both domestically and with our international partners, including multilaterals/bilaterals, that may pave the way for the release of pledged foreign investment as well as provide a comfort level to local investors.
The Letter of Intent dated 18 December 2023, signed off by the two economic team leaders, caretaker minister for finance and Governor State Bank of Pakistan, noted, “the caretaker government, in collaboration with other stakeholders, has been making concerted efforts to attract foreign investment, including through the forthcoming privatisation of SOEs, which will support our efforts to improve economic performance and will help replenish our gross reserves to more comfortable levels”.
To date, foreign direct investment levels remain very low, under a billion dollars per annum, and one would wish success to the stakeholders hopeful of an investment of up to 20 to 25 billion dollars in the pipeline as this inflow can turn the economy around.
However, international credit rating agencies are unlikely to upgrade Pakistan’s rating unless the pledged foreign investment has been disbursed and/or credible positive economic data released. Given our present ratings, the 6.1 billion dollar budgeted borrowing from commercial banks abroad and issuance of sukuk/Eurobonds remains unrealised.
The linkage between a Fund programme approval and/or after the success of a staff-level agreement with an improved rating by the three international rating agencies, apparently no longer applies to Pakistan as the country’s rating has remained unchanged since July 2022 (Standard and Poor’s and Fitch) and October 2022 (Moody’s).
This shortfall accounts for a massive rise in reliance on domestic borrowing, a highly inflationary policy, with the SBP noting a 24 percent year-on-year rise in domestic debt reaching 40.9 trillion rupees by the end of November 2023 compared to 32.9 trillion rupees in November 2022.
The first review documents acknowledge this rise in domestic borrowing which, in turn, led to contracting private sector credit with a commensurate negative impact on the GDP.
One would have hoped that the caretakers had relied instead on seeking sacrifices to slash the budgeted current expenditure allocated to vested groups/influentials, which would have reduced the need to borrow domestically as well as reduced the rather ambitious revenue target, (though a much needed change in the tax structure to raise reliance from indirect to direct taxes is not within the caretaker’s mandate) and begun pension reforms, the adviser to the caretaker prime minister compiled recommendations on pension reforms during the PTI administration.
In contrast the caretakers, like their elected counterparts, pushed the onus of mounting sector inefficiencies onto the general public through higher utility charges, a reflection of a lack of empathy with the middle income earners, who are increasingly being pushed into the ranks of the poor.
Copyright Business Recorder, 2024
Comments
Comments are closed.