As yet another of Pakistan’s long list of Prime Ministers met his end, jitters ran through the economy. The stock market plunged that Friday morning, as rumors of the disqualification preceded the court verdict. Before long though, the review of fundamentals kicked in, and the market began to resurge. An important factor this time, just like it was during Prime Minister Yousaf Raza Gilani’s ouster, is that there is continuity in the process. The government is not about to fall, the same party remains in power through to the next election, and no major policy upheavals are expected. Having said that, are some things likely to change?
Some policies that this government has pursued are closely identified with personalities rather than with the cabinet. The over-valuation of the exchange rate, for example, is something that the finance minister has made a cause celebre for himself. Given that he is now under a cloud, and may end up having to vacate his position, the exchange rate may be the first macroeconomic indicator to experience a wobble. As detailed in these columns some weeks ago, as soon as the State Bank got a chance, it let the rate slide in the inter-bank market, and we ended up with a 3% devaluation. This provoked a harsh response from the finance minister, who promptly made sure that a suitably deferential appointment was made in the State Bank and the rupee was once again shored up in inter-bank trading.
The situation is clearly untenable. Exports have been stagnating for three years while imports are on the rise. Foreign direct investment inflows have fallen, while remittances, though still strong, are also beginning to stagnate. There is no reason why the rupee should continue to hold fast to its value. The deputy governor of the State Bank has defended his July 5 decision to a Senate Standing Committee recently, and got a largely sympathetic hearing. At any indication that Mr. Ishaq Dar is no longer in the hotseat, we are likely to see the State Bank go into gear again.
The energy sector was initially high on the PML-N’s agenda, but after the payoff of the circular debt, and the commissioning of new projects under CPEC, there is not much being done. Meanwhile, circular debt has started to accumulate again. The government had paid off Rs480 billion in 2014. By May 2017, however, the debt had once again accumulated to over Rs400 billion, and at a time when oil prices have remained at an all-time low for over 12 months. The government is once again heavily indebted to independent power producers (IPPs), and is defaulting on capacity payments as well as interest payments, leaving IPPs in a situation where they are finding it difficult to pay for fuel. The structural problem remains where it is: losses have to be controlled and where necessary, rates have to be adjusted to recover running costs and make the distribution companies profitable. The government has been letting this situation continue unabated as it does not want to launch bill collection drives in an election year. What would be worse, however, would be to go into the next election with growing power shortages and blackouts. Can the “caretaker” set-up do anything about this? Or will they opt to just ride it out and wait for the next government to make the hard decisions?
While the Sharif government was heavily concentrated on boosting growth in the commodity-producing sectors, particularly large-scale manufacturing, and had indeed made some progress on this count, its interest in social indicators and social safety nets was more uncertain. The Benazir Income Support Program is, commendably, still running (and even more commendably, running under the same name), but there appeared to be little thought on whether a wider social protection strategy is needed, going beyond cash transfers. Similarly, as has been the case for all governments in Pakistan, there was a lot of chest thumping on the poor state of health and education, but little thought on what to do other than throw money at the problem, mostly with little tangible outcome. There is a basic lack of appreciation of how social welfare and social indicators support growth and development, and how long term sustainable growth is impossible without these investments. For a government that is mainly focused on an election which is less than a year ahead, these long-term considerations won’t really figure, although a party with a vision would have started thinking along these lines.
The current administration’s inordinate reliance on CPEC investments may also be skewing its thinking. The authorities seem to be seeing CPEC as a cash cow, with investments flowing in, technical assistance guaranteed and infrastructure development at record speed (something that the Chinese have developed a reputation for). There is no denying that CPEC represents a tremendous opportunity for Pakistan, and the country should position itself to take full advantage of it. However, investment in infrastructure is not a substitute for effective regulatory oversight and policy implementation. Adding on power plants can solve one problem, but you still need systems in place to check losses, ensure that bills are paid and that regularly needed upgrades take place. Similarly, transport infrastructure is hugely helpful to ordinary citizens and can significantly boost labor productivity, but it is up to the government to provide an enabling environment for small enterprises and individuals to generate business activity and jobs, which will ensure that the infrastructure will be used. Building big infrastructure will not solve structural problems in the economy. This is something that the Sharif brothers have shown some difficulty in grasping.
The post-Nawaz Sharif PML-N government is unlikely to take a radically different approach. However, the party would do well to think of the coming election as an opportunity to rethink how the old guard was doing things. By all accounts, they have a very good chance of getting another stint in power. One would hope that other voices in the party, who may gain some prominence in the coming months, will be more active in pushing for better governance and small-scale reform efforts, with an emphasis on improving the lives of ordinary people.
Some policies that this government has pursued are closely identified with personalities rather than with the cabinet. The over-valuation of the exchange rate, for example, is something that the finance minister has made a cause celebre for himself. Given that he is now under a cloud, and may end up having to vacate his position, the exchange rate may be the first macroeconomic indicator to experience a wobble. As detailed in these columns some weeks ago, as soon as the State Bank got a chance, it let the rate slide in the inter-bank market, and we ended up with a 3% devaluation. This provoked a harsh response from the finance minister, who promptly made sure that a suitably deferential appointment was made in the State Bank and the rupee was once again shored up in inter-bank trading.
The situation is clearly untenable. Exports have been stagnating for three years while imports are on the rise. Foreign direct investment inflows have fallen, while remittances, though still strong, are also beginning to stagnate. There is no reason why the rupee should continue to hold fast to its value. The deputy governor of the State Bank has defended his July 5 decision to a Senate Standing Committee recently, and got a largely sympathetic hearing. At any indication that Mr. Ishaq Dar is no longer in the hotseat, we are likely to see the State Bank go into gear again.
The post-Nawaz Sharif PML-N government is unlikely to take a radically different approach. However, the party would do well to think of the coming election as an opportunity to rethink how the old guard was doing things
The energy sector was initially high on the PML-N’s agenda, but after the payoff of the circular debt, and the commissioning of new projects under CPEC, there is not much being done. Meanwhile, circular debt has started to accumulate again. The government had paid off Rs480 billion in 2014. By May 2017, however, the debt had once again accumulated to over Rs400 billion, and at a time when oil prices have remained at an all-time low for over 12 months. The government is once again heavily indebted to independent power producers (IPPs), and is defaulting on capacity payments as well as interest payments, leaving IPPs in a situation where they are finding it difficult to pay for fuel. The structural problem remains where it is: losses have to be controlled and where necessary, rates have to be adjusted to recover running costs and make the distribution companies profitable. The government has been letting this situation continue unabated as it does not want to launch bill collection drives in an election year. What would be worse, however, would be to go into the next election with growing power shortages and blackouts. Can the “caretaker” set-up do anything about this? Or will they opt to just ride it out and wait for the next government to make the hard decisions?
While the Sharif government was heavily concentrated on boosting growth in the commodity-producing sectors, particularly large-scale manufacturing, and had indeed made some progress on this count, its interest in social indicators and social safety nets was more uncertain. The Benazir Income Support Program is, commendably, still running (and even more commendably, running under the same name), but there appeared to be little thought on whether a wider social protection strategy is needed, going beyond cash transfers. Similarly, as has been the case for all governments in Pakistan, there was a lot of chest thumping on the poor state of health and education, but little thought on what to do other than throw money at the problem, mostly with little tangible outcome. There is a basic lack of appreciation of how social welfare and social indicators support growth and development, and how long term sustainable growth is impossible without these investments. For a government that is mainly focused on an election which is less than a year ahead, these long-term considerations won’t really figure, although a party with a vision would have started thinking along these lines.
The current administration’s inordinate reliance on CPEC investments may also be skewing its thinking. The authorities seem to be seeing CPEC as a cash cow, with investments flowing in, technical assistance guaranteed and infrastructure development at record speed (something that the Chinese have developed a reputation for). There is no denying that CPEC represents a tremendous opportunity for Pakistan, and the country should position itself to take full advantage of it. However, investment in infrastructure is not a substitute for effective regulatory oversight and policy implementation. Adding on power plants can solve one problem, but you still need systems in place to check losses, ensure that bills are paid and that regularly needed upgrades take place. Similarly, transport infrastructure is hugely helpful to ordinary citizens and can significantly boost labor productivity, but it is up to the government to provide an enabling environment for small enterprises and individuals to generate business activity and jobs, which will ensure that the infrastructure will be used. Building big infrastructure will not solve structural problems in the economy. This is something that the Sharif brothers have shown some difficulty in grasping.
The post-Nawaz Sharif PML-N government is unlikely to take a radically different approach. However, the party would do well to think of the coming election as an opportunity to rethink how the old guard was doing things. By all accounts, they have a very good chance of getting another stint in power. One would hope that other voices in the party, who may gain some prominence in the coming months, will be more active in pushing for better governance and small-scale reform efforts, with an emphasis on improving the lives of ordinary people.