When politics clashes with economics

[Arain007]

When politics clashes with economics

By Dr Maleeha Lodhi

Although parliament will be completing its full term in a few months time, the government is still reluctant to announce a date for general elections. The avoidable uncertainty is exacting a heavy economic price, by delaying urgent policy decisions that are needed to avoid a full-blown economic crisis. The danger of such a crisis is heightened by official inaction on both internal and external dimensions of the country’s worsening financial position.

Government leaders have been sending mixed signals on the timing for the general election. At times they have hinted at elections by March 2013. On other occasions, in leaks and ambiguous statements to the media, they have indicated that polls might be held in April or May.

This political posturing has a twofold aim. Keep political rivals guessing and off balance. And use the poll date as a bargaining tactic in on-again, off-again talks with the opposition on a caretaker administration that the government is constitutionally obligated to install by agreement.

Opposition leader Nawaz Sharif has occasionally questioned this approach. But he has stopped short of pressing for an immediate election date, confident perhaps that, whenever they are held, the elections are his to win. The other parties in the ruling coalition want to be in the corridors of power as long as they can and therefore have little incentive to call for an earlier poll.

In any parliamentary system determining the election timing is the prerogative of the party in power, which almost always uses this to its political advantage. But rarely does a government constantly dance around the timing in the way the PPP-led coalition has done, spreading deliberate confusion and uncertainty about the date. At one point it even instigated media speculation that elections could be postponed. This is despite the fact that when parliament’s constitutional tenure ends in March 2013 general elections have to be held within sixty days of the assemblies’ dissolution.

The government has chosen to obfuscate the poll date at a time of growing disarray in the country – conditions that require a government empowered by a fresh mandate to provide leadership and chart a new direction. Last week’s sectarian and militant attacks were the latest reminder of the breakdown of law and order across the country. Karachi’s unchecked descent into lawlessness, collapse of government authority in Balochistan and the growing fiscal and economic crises are all a consequence of the lack of governance and a rudderless ship of state.

This dire situation underscores the need for a fresh mandate from the electorate, so that the next government can move decisively on a number of pressing issues. The reform-shy PPP government has long avoided taking tough decisions. It now cites the approaching election as its latest alibi for shirking serious policy actions. This means that in the period leading up to the elections, the ruling coalition will hold office but take no policy decisions, engage in politicking not problem solving and justify inaction by its preoccupation with electioneering. The current disarray can therefore be expected to continue.

In this backdrop, unpredictability about the election timing may serve the ruling party’s purpose, but not the interests of the country. Nowhere is this more evident than on the economic front. Delay in instituting corrective measures to address the worsening budget and balance of payments deficits increasingly risks pushing the economy over the edge.

The upcoming visit to Washington by the government’s economic team may be a measure of its desperation to raise much needed resources (by seeking US payment of coalition support funds), having failed to attract external financing so far. But such bowl-in-hand diplomacy may have already run its course. The country’s financing requirements are now too sizeable to be met by this kind of ad hoc economic management.

The patchwork approach pursued by the government has already left public finances in a precarious state. This is being aggravated by a number of disturbing trends, which show no sign of being reversed: a runaway fiscal deficit that could rise beyond the 2008 level, plummeting domestic and foreign investment, record borrowing from the State Bank and commercial banks and high inflation. Additionally, heavy energy subsidies and increasing interagency debt continue to fuel the unresolved energy crisis.

Compounding this perilous situation are rising losses in public sector enterprises that are draining government resources. Fiscal decentralisation under the new revenue sharing formula, without reciprocal provincial commitments to generate resources or restrain spending, has also intensified strains on the overall budgetary position. On top of this, the government’s fiscal laxity in the run up to elections is sapping public finances. The increase in the support price of wheat announced last week is an obvious attempt to woo the rural vote.

Meanwhile the country’s external account is close to the tipping point. Exports are stagnating and foreign direct investment has plunged to a record low. Large external debt service payments, including to the IMF, have been steadily depleting the country’s foreign exchange reserves. This has put pressure on the rupee with its value sinking to a record low against the dollar.

Referring to Pakistan’s weakening external position, a visiting IMF delegation in October called for “decisive” action to address what it called a “challenging outlook”. A Fund staff report issued earlier this year was more explicit. It said that the government’s policy mix was “leading the economy down an unsustainable and risky path.” And it warned that Pakistan could face sizeable financing gaps as the international reserve cushion began to erode due to the widening current account deficit and repayments to the IMF.

That moment of vulnerability is approaching. The country’s economy has little resilience to withstand a shock from any adverse international or domestic development. Even without such a shock a dire outcome appears likely. With foreign capital inflows drying up and external liabilities looming, Pakistan is on the brink of a situation where it would be unable to meet its financing requirements despite strong overseas remittances.

Repayments of $605 million are due to the IMF this month and $704 million in January-February. This means that the country’s present $9.1 billion of foreign exchange reserves (held by the central bank) could dwindle to a level that barely covers a month of imports by this fiscal year’s end. This could plunge the country into a balance of payments crisis, the risk of which is also being intensified by the government’s lax fiscal and monetary policies.

The only way to avert this is by emergency financing from the IMF. But for this to happen, a broad political buy-in will be needed for reform actions that will have to be swiftly undertaken. This in turn means that a government will have to be in place with a fresh mandate and the political strength to embark on a path of policy reforms.

Prospects of this happening are hindered not helped by the PPP government’s deliberately conflicting signals on when it plans to hold elections. This may be good politics for the ruling party but it is bad policy for everyone else. From this perspective the political transition appears to be out of sync with the economic transition that is needed to escape a crisis. The only way to mitigate the risk this poses to the country’s financial stability is to ensure that elections are called sooner rather than later so that the next government has sufficient time to take steps to avoid an economic meltdown.

The country needs an end to uncertainty not more displays of political gamesmanship that imperil the economy – and national stability.

Source: When politics clash with economics