Political uncertainty harming the economy

The political uncertainty has been primarily responsible for the unending economic instability that has gripped Pakistan for most part of the current year. Though political affairs were unsettled during the tenure of the previous government but after the induction of the coalition government things have gone down from bad to worse.

The most excruciating impact of political squabbling is being faced by the national economy that is getting weaker by the day and all economic indicators are showing downward trends putting the financial managers in a state of quandary.

The high hopes pinned by the coalition government in the ability of the incumbent finance minister to bring back the battered economy on the road to recovery have proved to be nothing more than a mirage as he is now found singularly unable to address the profound issues impeding the future economic growth.

 

This failure has apparently unnerved the financial planners who feel badly trapped in the ensuing problems. Many economic observers also opine that, at the moment, the economic challenges appear to be formidable and look to be much above the ability and capacity of the incumbent financial policy makers.

The most problematic aspect is the unstoppable inflation that has done tremendous harm to the national economic cycle and has lives of the people in jeopardy. The incessant downward slide of the economy could be gauged by the fact that the State Bank of Pakistan (SBP)
that was usually found to be quite upbeat about the economic prospects has now publicly lowered its projected GDP growth from the previously announced range of 3-4 per cent for the current fiscal year bringing to fore the grim reality that any expectations of a rise in national productivity levels may not be entertained.

The central bank however emphasised that one of the major factors responsible for the GDP’s growth getting lower is of the horrible impact of the recent unprecedented floods that has retarded the economic growth by miles and may take extraordinarily long time to overcome the setback. SBP has also mentioned that the stabilisation policy has played a key role in the suppression of GDP growth and this aspect has a lot to do with the economic thinking and perception of the incumbent finance minister who feels comfortable in adhering to the old school of financial policy making that are considered out of place by many experienced economic observers.

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The current scenario is that the flooding is likely to impinge on the country’s real economic activity through various channels and fears are expressed that losses in agriculture emerging from the damages to crops and livestock are likely to transmit to the rest of the economy through various backward and forward linkages.

It is also pointed out that the large-scale destruction of infrastructure in the affected provinces might also undermine the country’s growth prospects during the year and its cumulative effects will haunt the national economy for long.

Though the central bank rightfully avoided mentioning the much more harmful aspects of the lack of economic growth but it is now quite well-known that industries have either shut down or drastically reduced their production due to high inflation and the unavailability of gas and electricity.

The most negative impact is caused by the restriction imposed by the SBP on opening of letters of credit (LCs) for imports in an attempt to save dollars that is considered not a viable policy to follow as dollars are bought from the informal market giving credibility to the international financial watchdogs such as FATF that Pakistani economic practices are highly suspicious and need consistent, close and aggressive monitoring.

The central bank has tried to soften its negative assessment by pointing out that several corrective and other measures were likely to slow the momentum of economic activity during the next year including a hike of 675 basis points in the policy rate with the view to control the rampant inflation and it cites this step as a means accepted globally though it may not suit the already depressed financial conditions of the country.

The central bank also stated that management measures announced in the previous fiscal year have also some bearing on the situation along with the adverse effects of the government’s decision to unwind the fiscal package for fuel and electricity subsidies towards the end of the current financial year.

The SBP also noted that an upsurge in global commodity prices and the fallout of the Russia-Ukraine conflict led to a marked deterioration in the current account deficit.

It also expressed worries that the delay in satisfactory implementation of the IMF programme has added to the economic woes and have again highlighted the need to address
the structural weaknesses of the national economy such as a narrow base of foreign
exchange earnings and meagre inflows of foreign investment.

The weakening of economic movement has spurred international credit rating agencies to slash the credit rating of Pakistan that is the obvious sign of evincing dissatisfactionover the less-than-satisfactory handling of economic matters.

In the current situation it is observed that the political instability is causing unnecessary delay in the release of the due financial tranche by the IMF and this delay has pushed the Pakistani foreign exchange reserves to a dangerously low level that may result in halting the national economic activity. For the moment it is reported that the IMF is not satisfied with the overall handling of the economic matters by Pakistani authorities.

The decision-makers at the IMF have explicitly pointed out that the Fund is parleying with Pakistan with a view to re-prioritise the issues of improving target support towards humanitarian needs while accelerating reform efforts to preserve economic and fiscal sustainability.

This starkly significant stance is indeed very telling and has put tremendous pressure on the economic sentiment in the country that resultantly has enhanced stock market’s anxiety regarding Islamabad’s ability to meet its external financing requirements and debt payments amid dwindling foreign exchange reserves.

The financial circles are highly skeptical of Pakistani economic practices as was borne out by the fact that a top Japanese investment bank has included Pakistan among seven states threatened by a currency crisis, raising the perceived default risk in the next 12 months as the country continues to struggle with balance-of-payments woes, stubborn inflation and a weak exchange rate.

It is quite clear that the IMF by delaying release of funds due to Pakistan has grossly deepened the liquidity crisis faced by the country. While it is conceded that IMF is at liberty to ensure adherence to the loan conditions by the recipient country yet the highly wobbly economic circumstances of Pakistan definitely require a much-needed flexibility on part of the international donor so that the country is provided with badly needed fiscal and monetary space enabling it to put back its battered economy on the rails again.

Though the IMF may be asked to become flexible but side by side it is imperative for the Pakistani financial managers to treat the current crisis as a very serious awakening call and begin cleaning up the financial Augean stables as expeditiously as possible as this is the only way out.