The new political government, which will be inducted in office after the general elections scheduled for next Monday, is going to inherit a slowing economy and would be required to take unpopular decisions to rectify the fiscal imbalances already threatening to unravel the budgetary targets for the year.

Both businessmen and economic experts underscore that the increasing consumer prices — especially of food, and burgeoning external account deficit are the major risks to the national economy which the new government would have to urgently address to prevent prolonged economic downturn.

Dr Ashfaque Hasan Khan, special secretary finance, says the hike in global crude prices was the only risk to the economy. “Crude in the world market has risen by 76 per cent since Jan 2007 when we last revised the domestic oil prices. The government is currently paying a subsidy of Rs14.5 billion per month to provide cheap oil to consumers. If we do not raise the domestic prices, the amount of subsidy on account of oil, including that for power generation, is feared to rise to Rs186 billion from the present Rs72 billion. That could upset the fiscal deficit target of four per cent for the current fiscal and widen it to just below six per cent,” he says.

The government’s response – cut back on development spending of Rs520 billion for the year – to the risk is disappointing, businessmen and experts agree. Instead of taking the bull by horn, the government has cut development spending in its bid to handle the situation indirectly.

“Unlike past when the government would find few takers for the argument advanced for raising the oil prices, we see a general consensus on the issue with the proviso that the domestic prices should be increased gradually, without causing the consumer prices to shoot up and burden the common man. And yet the government has dithered,” a leading knitwear exporter, who asked not to be named, says. “It’s a political decision not to spike the domestic oil prices and leave the matter for the next government to decide,” he says.

Like most others, he holds that the government under President Pervez Musharraf was reluctant to increase the domestic oil prices owing to the upcoming elections. “If the domestic prices are raised to recover the losses to the economy on this count, a large number of votes are feared to swing to the anti-Musharraf parties and make it quite difficult for the president to achieve his objectives from the upcoming elections.”

Caretaker finance minister Dr Salman Shah – who was also the prime minister’s advisor on finance in the previous government of the Pakistan Muslim League-Q, recently said in Lahore that the next government would spike the oil prices over a period of six months. And when he told a gathering of businessmen in Karachi last week that “the new government would inherit a sound economy” many in the audience found themselves smiling at his assertion.

Their reaction was reflective of the prevalent pessimism about the health of the economy. Their pessimism cuts across the political as well as economic divide in the country. Most people fear that the pace of economic slowdown is going to pick up in the days to come.

This fear about the future health of the national economy stems from both the weakening economic data for the first half of this fiscal as well as the prevalent political mood ahead of the elections. “Which direction the economy takes in the coming months largely depends on the results of the elections. If the results are acceptable to all the political players and if political stability returns to the country after the Feb 18 polls, the economy’s slide could be reversed,” says a senior executive of multinational company.

But others insist that the nation would also have to take hard economic decisions in order to check economic slide. “We should forget putting the economy back on the rails unless hard economic decisions are also not taken. It is a very tricky situation. Even if political stability returns and the election results are not challenged by any one, it wouldn’t be easy for the new elected government to take such hard decision as raising the domestic oil prices. If it did it would do so at the risk of alienating its voters, and if it didn’t it would risk presiding over a deteriorating economy,” insists a former president of the Lahore Chamber of Commerce & Industry.

The economic data for the first six months of this fiscal shows that the trade imbalance has expanded 27 per cent to above $8 billion from the last year and price inflation has gone up to more than eight per cent. Food inflation is running in the double digits, reaching above 14 per cent in October. The rupee has weakened to its 2002 low and foreign exchange reserves depleted to below $15 billion from above $16 million in October because of the rising global crude market.

In order to finance its budget, the government has resorted to heavy borrowing of Rs237 billion, crossing its ceiling for the year and fuelling inflation, which is feared to rise to 7.5 per cent against the target of 6.5 per cent for the year. Foreign inflows of money of have dipped due to the global financial crunch on the back of sub-prime crisis in the United States and domestic political situation.

The central bank has warned the government to rectify the fiscal imbalances, stop borrowing for financing its budget and retire its debt to address the risks to the economy. The central bank and international investment and fund managers have already cut their growth outlook for Pakistan below seven per cent.

The critics of the government’s growth policy say the genesis of the current slowdown lies in what they call flawed economic policies being pursued for the last eight years. “The government failed to take advantage of the fiscal space 9/11 had afforded it by the huge foreign inflows of money in the form of workers’ remittances, which have gone up to $6 billion a year, foreign investment, which peaked to above $6 billion in 2007, debt rescheduling, and write-offs by the Paris Club. Instead of investing in export-oriented industry and agriculture, the government encouraged import-based consumerism and the services sector. That is not sustainable growth. Hence we have a wide external account gap, high inflation, decelerating industrial output and exports, failed crops and a slowing economy today,” says Sartaj Aziz, a former finance minister in Nawaz Sharif’s last government.

Dr Ashfaque defends the government’s policies and says they turned the national economy into a vibrant, modern, industrial economy. He says the present slowdown in the economy should not be resented. “It is part of the business cycle,” he says. “We have grown at an average seven per cent for five years, peaking to above nine per cent in 2005. How many nations will grow at above six per cent this year? How long would you have us grow at this pace before calling it sustainable growth? Foreign investors have faith in our economic performance and haven’t stopped investing here. Nobody has pulled out his investments. If this isn’t sustainable growth, what is?”

Whether the economy slows further or reverses its direction, the recent nationwide wheat shortage and unrestrained spike in the prices of flour and other essential food items has already brought hard times for an overwhelming majority of the people.The slowdown in growth may not impact hugely on the economic wellbeing of the majority of the people in the short-term. But the wheat flour shortages and the hiking prices of other foods are said by experts to have already pushed a large number of people below the poverty line.

“I guess the number of people living below the poverty line or just above it would have increased substantially after the wheat shortages that hiked the flour prices to almost double their April-May level,” says Sartaj Aziz, a former finance minister. “The earnings of the low income, and poor and vulnerable segments of population have remained stagnant or even declined due to current economic slowdown, but their food expenditure has spiked sharply and affected them adversely,” he says.

The government claims to have reduced poverty in the country by more than 10 per cent to below 25 per cent because of its growth strategy that saw the nation’s GDP expand by an average seven per cent over the last five years. The last poverty numbers were based on a survey carried out in 2005 when the country had record wheat and cotton production and the GDP growth peaked to above nine per cent. “The percentage of the poor would have increased considerably if and when the government decided to release the poverty numbers for the current year,” says Aziz. Many agree with him.