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THE Panama verdict has raised a plethora of questions, most centring around legal nuances and technicalities. Some questions, however, are non-political in nature, and concern the possible fallout on Pakistan’s economy and its prospects for growth. Will our economy be able to sustain the growth momentum it has lately experienced? Will investments under the China-Pakistan Economic Corridor (CPEC) be affected?
Considerable research has been carried out on these questions, which suggests that political events and economic growth are interconnected. The causation usually runs from the former to the latter.
In a seminal paper, Alberto Alesina et al studied the impact of political instability on economic growth in 113 countries, from the period of 1950-1982. They found that political instability, whether through constitutional or unconstitutional means, results in significant decline of economic growth. In an analysis of Pakistan’s financial market from 1999-2006, Ahmed Khalid found that political instability due to a domestic or international event tends to instigate increased volatility, which in turn has effects on domestic economy and financial markets.
Outside the realm of academia, Venezuela’s present predicament offers a vivid example of how political instability has led to its economic crisis and brought the country to the brink of collapse.
For a start, consider the uncertainty that may have arisen out of our present situation. A significant extent of it was avoided when the ruling party accepted the verdict. Had it not done so, confrontation between the executive and the judiciary would have wrought substantial uncertainty, and given rise to probable risks.
In the short term, the continuity of policies regarding CPEC is essential for maintaining macroeconomic growth.
Given that negative political fallouts tend to affect economic growth negatively due to the ambiguity they create, it would seem that the economy might not be significantly affected by this event. Any probable risks would be further attenuated due to the fact that the interim prime minister is from the same party, for it ensures the continuity of the policies under Nawaz Sharif’s government. This is good news overall, especially for the business environment.
Of late, the momentum generated by investments under CPEC have largely driven the improvement in Pakistan’s macroeconomic indicators. Policymakers are banking heavily on its success, not only to sustain this momentum but also to attract new investments in the economy. With Nawaz Sharif’s disqualification, a question mark has arisen over its continuation (especially the early harvest projects).
But much of the speculation has been quelled in light of the Chinese ambassador’s assurances of continuity irrespective of regime changes. Besides this assurance, there are good reasons to believe that the verdict will not affect ongoing work under the CPEC umbrella.
First, the Chinese side is largely taking care of financing requirements at this moment in time. Second, more than one Pakistani institution is involved in CPEC. Especially important is the role of the army, which has pledged its resolve to ensure CPEC’s completion at any cost. Above all, as stated above, CPEC is the cornerstone of the recent surge in our economy’s growth rate. Any politician or political party, regardless of affiliation, is highly unlikely to undermine this effort at the cost of economic growth.
Complementing CPEC are the investments bundled under the Public Sector Development Programme (PSDP), which witnessed a record budget outlay in the present fiscal year. Government-led investments (at both federal and provincial levels) have always been a significant presence in Pakistan’s economy and in efforts aimed at capital accumulation (ignoring issues like the productivity and efficiency of these investments).
If the budgeted PSDP expenditures do materialise, considerable investment would be infused in the economy; that could further boost the growth rate. Despite issues that the Federal Board of Revenue faces in revenue gathering for this purpose, it is likely that a considerable portion (if not all) of the PSDP funds will materialise given that FY2017-18 is also an election year, a time when public sector expenditures traditionally witness an increase.
Besides these major determinants, other factors are also unlikely to pose a significant challenge to the economy’s growth prospects in the short run. Reserves, although made up largely of borrowed money, may be enough to cater to short-term demands. The number of foreign firms that have come to Pakistan because of CPEC and our economic growth are not expected to wrap up their investments and operations. Public sector investment will pick up pace as the election nears.
Stock market swings will continue, however, since political instability is not the only determinant of its performance. And repayment pressure on accumulated debt will remain manageable, at least until the next year, when economic forecasts suggest they will become a problem. Ideally, policymakers should not fall prey to irrational exuberance over this small window, because factors like increasing circular debt and loss-making public-sector enterprises will pose problems even in the short term.
In conclusion, unless there is some major political upheaval the economy will likely sustain its momentum, with perhaps a few minor hiccups. This scenario though, is largely dependent upon the continuity of policies initiated under the former prime minister. But it is wise to be cognisant of the fact that the above analysis stands true only for the short run. More important for the economy is the long run, and policymakers should not be oblivious to the momentous challenges that Pakistan’s economy will face in the future.
These include the dangerously elevated current account deficits (which recently hit a historic high), circular debt, persistent fiscal deficits, decline in exchange earning avenues (exports, remittances and FDI), total accumulated debt, maintaining a healthy level of FX reserves, hefty repayments on loans (including those on CPEC), rising inequality, creation of employment opportunities, etc.
As a leading economist once remarked, the fruits of political stability depend on the extent to which it translates into good governance. In the long run, to sustain Pakistan’s growth momentum, the primary goal must be good governance.
The writer is an economist.
Twitter: @ShahidMohmand79
Published in Dawn, August 3rd, 2017
