Many Pakistanis are worried about a perceptible sense of drift in Islamabad. The judges’ issue is hanging fire. Acute power shortages of up to 12 hours a day persist. Inflation is up to 30 per cent. And the war on terror is going nowhere, despite the fact that its “ownership” has formally passed from the military to the civilians.
More alarmingly, the Pakistani economy which grew by 6.8 per cent a year from 2003-07, is sputtering in the face of post-election economic uncertainty and political instability. This is, potentially, an explosive situation. Without continued high growth and poverty alleviation, significant sections of the politically volatile urban middle classes will slip through the net, creating a vast pool of angry unemployed or under-employed. With the government becoming increasingly immobilized in the face of rising Islamic and anti-American nationalism (the irony is that America remains Pakistan’s largest military and economic donor) and economic discontent, the country could slip into political anarchy and state-failure.
The budget deficit for 2007-08 was targeted at 4% of GDP but has actually turned out to be about 8%. The balance of payments deficit is also about 8% of GDP, the highest ever in our history. Forex reserves have fallen from a high of US$16.5 billion in October 2007 to about US$11 billion today, despite being recently bolstered by a combination of US support ($500 m), ADB ($200 m), and sale of private sector company shares to foreigners ($850 m). Inflation is soaring at 30%, the highest ever, following a gradual removal of subsidies on oil and gas. International credit rating agencies have downgraded Pakistan (it now ranks 87th in the list of countries with business prospects), citing both microeconomic imbalances and political instability. Pakistan’s Eurobonds are trading at 7% above the bench-market rate (six months US treasury bills) compared to when they were issued and were only 2% above the bench-market. The World Bank has cancelled project aid of US$500 million and postponed disbursal of a similar amount. About US$1.25 billion in privatization deals is also on hold. A planned bond issue, for which an investment bank was actually mandated, has been inexplicably cancelled. Experts say that if targeted foreign resources fall by about US$4-5 billion this year as a result of all this, the rupee would have to be significantly devalued (it has already devalued by about 10 % in the last one month) and interest rates would have to rise further, a painful and politically explosive development.
In the face of these gradual slippages, the Karachi stock exchange has not been able to retain its resilience. The KSE index stood at 15,700 points in the third week of April. But by June 20, it had fallen by nearly 4600 points or about 30%, implying a decline of Rs 1.3 trillion or US$20 billion in market capitalization, equivalent to 13% of GDP, reflecting the increasingly visible malaise in the economy. There was a temporary revival in late June following the imposition of some technical circuit-breakers on share business by the Securities and Exchange Commission, but the fundamental weaknesses remain and will keep market sentiment depressed. So what will it take to get back on track urgently?
First, we need a full fledged working government in Islamabad led by a permanent prime minister and finance minister. The ad-hoc arrangement which followed the PML N’s pull-out from the federal coalition two months ago in protest at the refusal of the PPP to restore the judges is not conducive to confidence-building. Either Mr Zardari should put his coalition back on track and get down to business with all the ministers working overtime – implying a swift resolution of the judges’ issue and the fate of President Pervez Musharraf that meets with the approval of the PML N. Or he must have the courage to say goodbye to the PML N, fill the slots with full time ministers from his own party, and manage. This no-man’s-land brand of economics and politics is ad-hocism of the worst kind.
Second, the government should stop dragging its feet on all the unpopular economic decisions that need to be taken to straighten out the fundamentals of the economy. This means abolishing general subsidies on fuel and food while creating specific ones for the poorest sections of society. It also means re-creating an economic environment that is friendly towards both domestic and international investors.
Third, the government must tackle the war on terror seriously without worrying about any popular backlash. The fact is that this war is now Pakistan’s war as much as it is America’s war and Pakistan cannot afford to post failure. Indeed, without the economic assistance of the international community and its financial institutions, especially the US whose Congress is already debating the political virtues of billions of dollars in assistance to Islamabad, Pakistan cannot expect to get back into economic shape and improve the lot of its people.
Mr Asif Zardari’s laid-back approach is creating public disquiet. Problems have mounted because difficult decisions were postponed and controversial solutions swept under the carpet. If he wants to be a leader, he must take bold initiatives and demonstrate long term wisdom rather than worry about his popularity in these trying times.