PAKISTAN’S economic challenges, particularly its fragile external and liquidity position and unsustainable budget deficit, are enormous, and the Feb 8 polls have failed to bring even a semblance of political stability needed to deal with them by producing a fractured mandate.

Last summer, the country had barely avoided a default on its international payments thanks to a nine-month $3 billion bailout package from the IMF, scheduled to end in mid-April.

The split public mandate has triggered intense politicking, as no party has won enough seats to form its government on its own, and every party is reluctant to lead the country. The PPP has announced that it will conditionally back a minority government to be led by the PML-N from the outside, knowing the failure to stabilise the economy could result in political backlash from the public.

In return for its support, it wants all top constitutional offices for itself. Additionally, it has demanded the PML-N support for forming its government in Balochistan and a share in Punjab.

With major parties reluctant to take helm, experts still present an optimistic, though cautious, outlook

The PML-N, which had initially expressed its desire to form a coalition with the PPP and other political stakeholders as enunciated by its leader Nawaz Sharif in his post-election speech shortly after it became clear that his party hadn’t won enough seats to make government on its own, is now backtracking on it. It fears that it will alone have to bear the consequences of the tough decisions while others will enjoy the perks of power without sharing responsibility.

No wonder PML-N stalwart Khawaja Saad Rafique has said that his party isn’t willing to wear this “crown of thorns” (unless others are willing to share the burden). He has rightly drawn the attention of other political stakeholders towards the absence of a clear public mandate for any single party, saying the onus of forming government rests with every party and not just his party.

Nevertheless, the major parties are still talking to one another to strike a deal and jointly form a new government. Both PML-N and PPP continued discussion around the formation of the new government on Saturday, raising hopes that they may be able to strike a deal sooner than later by showing flexibility in their stances and demands. Besides, both Imran Khan’s PTI and Maulana Fazlur Rehman’s JUI-F have decided to sit in the assemblies despite their allegations of election fraud.

‘Parties will find common grounds’

“The encouraging development is that all political parties have chosen to sit in the parliament (despite reservations on flaws in elections),” Asad Sayeed, a political economist based in Karachi, told Dawn on Saturday. “That should give us hope that they would find out common grounds to forge government and work collectively to stabilise the economy.”

However, investors will remain anxious as long as clarity on the new government is achieved. The global credit rating agency Moody’s has recently declared Pakistan’s inconclusive election outcome, resulting in a hung parliament, as well as the ensuing politicking for the formation of government, as ‘credit negative’, reflecting the investors’ worry over political and economic policy uncertainty obtaining in the country post elections.

The split public mandate followed by claims of election fraud could potentially lead to more political instability and street protests at a time when the country faces significant macroeconomic challenges, it said. The agency noted that the coalition set-up might not be politically strong or united, making consensus difficult on pursuing tough but necessary reforms.

A pre-poll Topline Security report had also noted that a coalition government with the support of smaller parties “will remain fragile and may struggle to implement the much-needed economic reforms”.

Mr Sayeed, however, isn’t particularly worried about the ability of a coalition or minority set-up to undertake tough reforms. “It all depends on what kind of minority (or coalition) government comes to power. They can implement reforms gradually unless they try to tinker with politically sensitive issues like the National Finance Commission (NFC) award and such,” he argued.

‘IMF deal must for stability’

Shahid Ali Habib, CEO of Arif Habib Ltd, agreed. “I think our politicians are responsible people and political parties like the PML-N and PPP understand well what kind of decisions they would need to make for tacking lingering economic troubles.”

At a time when the economic outlook is becoming more uncertain due to unclear public mandate and rising militant violence, the experts Dawn spoke with agreed that the immediate task facing the incoming government would be to negotiate a new, larger and longer deal with the IMF, which is crucial to not only revive the flagging economy and avoid a default but also to secure financing from the other creditors as the nation’s external financing requirements are estimated to average around $27bn over the next several years.

“The immediate task for the new government would be to negotiate a larger programme of $6bn to $8bn for a period of three to four years,” Mr Habib said. “The programme would require Pakistan to reduce losses of the state-owned enterprises (SOEs) and privatise some of them. Besides, the next set-up will be required to work on energy sector stability, debt sustainability and reduction of fiscal deficit through broadening the tax net and cutting unnecessary public expenditure so that the country could move towards growth.”

Mr Habib said that only after an IMF deal was struck could the nation expect economic stability. Moreover, support from other multilaterals and bilaterals like China, the United States, the United Arab Emirates and Saudi Arabia also hinges on the IMF programme. “They need this assurance that we would discipline ourselves and carry out necessary policy and economic reforms to put the economy on a sustainable growth trajectory,” he said.

‘No room for misstep’

Miftah Ismail, a former finance minister, said whichever party or parties made government, they would have to deal with the IMF for the upcoming review under the existing bailout facility followed by negotiations for a new bailout programme. “We have no room for another misstep,” he said, referring to the mismanagement of the relationship with the lender of the last resort under Ishaq Dar. “If we don’t show seriousness for reforms, we will be doomed.”

Mr Ismail said the next step towards economic stability would be to reduce the fiscal deficit by 1 to 1.5 percentage points and produce a primary budget surplus of 1pc by broadening the tax net and cutting public expenditure during the next fiscal year.

“This is crucial to ease the life of inflation-stricken poor to middle classes. Poverty in the country is increasing due to soaring inflation as people are unable to keep up with the prices. The deficit reduction will help reduce inflation and also provide room for interest rate cuts (to spur private investment),” he said.

It is widely believed that a minority coalition government may not be very united and politically strong, and it will face challenges in securing consensus to pursue difficult but necessary reforms, including revenue-raising measures.

Mr Habib, the Arif Habib Ltd CEO, doesn’t subscribe to this view, though. “Nothing will be difficult if we reach an agreement with the IMF for a new programme. I believe that the PTI opposition will also lend its support to the incoming government on tough economic decisions for the sake of the country and its people. We should not lose hope.”

He also pointed to the recently created army-backed Special Investment Facilitation Council (SIFC), “which will help and guide government implement difficult policy and other reforms and navigate through our tough times”.

He added, “The first year would be tough. But if the government succeeds in implementing reforms, we can head for better days.”

Published in Dawn, February 18th, 2024