FeaturedNationalVOLUME 19 ISSUE # 14

The twin challenge of political uncertainty and economic instability

The Feb 8 election results have not only created an atmosphere of extreme political uncertainty in the country but a fragmented verdict has also become a source of economic instability. In the immediate aftermath of the elections when it became clear that no single party was in a position to form a government, the capital market responded negatively.

Amid growing doubts about the early formation of a coalition government, the PSX saw massive selling by nervous investors which wiped out 1, 878 points in a single session. The dithering on the part of the PML-N and the PPP over the composition of the next government and the PTI announcing a countrywide protest movement over alleged rigging in the elections, the market sentiments nosedived and the equities lost over 2,280 points in the next two sessions pushing the index below the 60,000 level. Overall, the KSE 100-share index closed at 59,872.96 points plunging by a staggering 3,071.04 points or 4.9pc week-on-week.

On the other hand, following the elections, the Pakistani currency dropped to Rs281.77 against the US dollar in the open market, maintaining a downturn for the fifth consecutive working day. According to the Exchange Companies Association of Pakistan (ECAP), the currency decreased by 0.06% or Rs0.17 on a day-to-day basis in the retail market. During the week the rupee closed at Rs279.36 against the greenback, weakening by Rs0.08 or 0.03pc week-on-week. Cumulatively, the rupee lost 0.27% or Rs0.67 over a week. Currency dealers in the open market attributed this downturn to a reduction in the supply of foreign currency but the development is not unrelated to the present state of political affairs in the country.

The failure of the winning parties to evolve an acceptable formula for a coalition government is also not without its impact on the inflationary pressure which is linked to the prevailing market sentiment and the volatile run of the economy.The latest hike in gas and petroleum oil prices for households and industrial consumers in February is estimated to increase the inflation rate by almost half a percentage point to around 25% in the current fiscal year 2023-24.
An unresolved political crisis over the establishment of a new government at the centre is also causing a delay in securing a new International Monetary Fund loan programme post-April, a situation potentially threatening a further rise in inflation. According to market expert Arif Habib, the increase in gas prices could lead to a 43 basis point rise in the inflation rate.

No wonder, industrial organisations are protesting strongly against the government’s recent decision to increase gas tariffs, warning that this move could lead to the shutdown of numerous business units, a rise in unemployment, and a halt in exports unless the decision is reversed. They have jointly appealed to the government to rescind the tariff increase for the sake of the national economy and to prevent the industrial sector from sinking deeper into recession. They have pointed out that the international competitiveness of Pakistan’s textiles and apparel exports was being continuously eroded by ever-increasing energy prices, which were more than double as compared to those in competing regional economies.

There is a consensus of opinion among economic experts that the political crisis in the country should be urgently resolved in order to secure a new deal with the International Monetary Fund (IMF) which is the key to maintaining economic stability. It may be recalled here that the current IMF programme is set to conclude next month. This means that any dilly-dallying in the matter will exacerbate economic challenges and push the economy over the edge

In the given circumstances Pakistan needs a stable government to negotiate a substantial, extended and reform-centric 24th Extended Fund Facility from the IMF. The requisite reforms include maintaining fiscal discipline, curbing government debt, reducing inflation and lowering borrowing costs for both the public and private sectors. There is also a need to address inefficiencies in state-owned enterprises and the energy sector and restructure the Federal Board of Revenue to collect more revenue for development activities. This underlines the need for a strong, stable government with the mandate to take difficult decisions.

In the past, a wobbly coalition government proved unequal to the twin task of controlling inflation and stimulating growth. The caretaker government also took no step to provide a competitive environment to industries, lower the cost of production and reignite the engine of the national economy, which has left the industrial community in disarray.

In the last two years, local businesses rapidly lost market share to regional peers due to high cost of production. A basic reform expected from the incoming government is to fix the prices of utilities in consultation with stakeholders, so that they are regionally competitive and industrial activities are not unnecessarily hobbled. There is a general agreement among experts that in the short to medium term, economic performance will depend on the signals from the new government’s dealings with the IMF for the second review under the $3bn Stand-By Arrangement review and the next EFF programme. This emphasizes the need for setting up a strong, stable government at the centre to address critical issues such as fostering industrial growth, restoring cross-border trading, generating employment opportunities to uplift the marginalised population and mitigating the impact of inflation, which has upset the budget of the common household in the country.