INTER-RELIANT REALMS - POLITICS & ECONOMY

FOZIA ISHAQUE (fozia.ishaque@hotmail.com)
Apr 13 - 19, 2009

Political stability is the pre-requisite for economic development and instrumental in bringing foreign investment to the country. Pakistan's economy is ensnared by the political rumpus and deteriorating law and order in the country, particularly, during the past couple of months. There have been several incidents which aggravated the circumstances including the verdict of Supreme Court to disqualify the central leadership of PML (N), Sharif brothers, from taking part in elections combined with imposition of governor's rule in the largest province of the country by the president. Moreover the militant's attacks on Sri Lankan cricket team in Lahore on 3rd March, 09 and on Manawan Police training centre jolted the roots of the country. This series of events gave a lethal blow to the economy by eroding the confidence of investors, particularly foreign investors, and the government's inability to resolve political conflicts and disorder in economic activities.

Political incoherence and government's poor capacity for crisis management is once again exposed during the first year of democratic governance in Pakistan. Top political leadership is unable to persuade the PPP and the PMLN to moderate their disposition towards each other despite the fact that Pakistan returned from verge of a major political breakdown on March 16, 2009 mainly because of factors external to a normal functioning democracy. The Pakistan Army played the vital role in defusing tensions by encouraging the PPP-led federal government to reinstate Chief Justice Iftikhar Chaudhry and other deposed judges. This development led to a relatively stable state of affairs preventing the country from another colossal political disaster. But these recurring and frequent havocs have jerked the foundations of socio economic infrastructure.

Another rising problem is a possibility of an increase in inter-provincial disparity gaining momentum with Punjab moving ahead on the growth path while other provinces are engulfed by mismanagement and lack of ownership of development program in their fragmented societies. There is little hope about the government delivering much on the social sector front, keeping resource constraints in view.

IMPLICATIONS OF POLITICAL INSTABILITY:

As a matter of fact an economic recovery is subject to political stability and environment conducive for investment and doing business. Our below par economy is facing undesirable impacts of global slump as well as mismanagement committed in the past by accumulating huge subsidies, resulting in a decline in GDP growth, exports, investments and privatization and hike in inflation, current account deficit and imports. Immediate effects of the political turmoil were visible in the fall of KES 100-share Index by 4.0% with a scare among foreign and domestic investors. Recent developments can transmit an overall negative impact on the economy. Terrorism coupled with political instability would create bleak chances of early economic revival; therefore the country might not be able to meet even the IMF (International Monetary Fund) targets, which will bring the whole situation back to square one.

Pakistan and the IMF recently revised downward real GDP growth target to 2.5% from the earlier target of 3.4% for 2008-09. This GDP target was really in danger because the non agriculture sector of the GDP was severely affected owing to halting of all economic activities. The tax collection target of Rs1,300 billion is a headache for the incumbent regime because the recent political turmoil had already resulted in negatively impacting the tax collection. There is no possibility for achieving the tax collection target of Rs1,300 billion by the end of June 2009. The FBR crossed its initial set target of Rs1,250 billion by the end of the current fiscal year, which can be counted as an achievement for the existing FBR administration.

STATE OF ECONOMY:

Some points which carry primary importance for economic turnaround are: stubborn inflation, FX reserves, LSM (large scale manufacturing) and liquidity crunch in the real estate business. The core inflation continues to be obstinate at around 18.5%. It is apprehended that if the current trend in prices persisted it might become difficult to achieve the target of reducing inflation to 12.0% by the end of the current fiscal year. The IMF might back out from its inclination of reducing high interest rate during first economic review held in mid-February, 09. Large Scale Manufacturing in general and textile industry in particular have registered negative growth. It has resulted in inordinate downsizing of around one-third work force giving rise to soaring unemployment.

In addition there is a corresponding slide in real estate and construction business that compelled to reduce work force to a large number. These frequent lay offs of a large number of unskilled and semi-skilled work force in the country has resulted in an upsurge in the poverty in the country. Inclination of employer to trim down to work force is a direct implication of the economic crisis that could worsen further because of political turmoil.

The FX reserves have been hovering a little over $10.0 billion since the injection of inflows from foreign sources like the IMF, WB, ADB, the US, and China. The government in November 2008 had expressed optimism that with the financial assistance of friendly countries it would be possible to increase FX reserves to around $14.0 billion by the end of the current fiscal year. An ambitious program of privatization for the remaining national assets is on hold because of domestic political turmoil and violence and liquidity crunch in international and domestic market.

CONCLUSION:

There is an unsteady as well as trembling economic recovery being executed by managers of the national economy mostly on borrowed money. It also has received jerks from the recent political crisis and militants attacks. It costs us enormously and widely in terms of the confidence in business communities, the government and political leadership, a further loss of confidence of foreign investors. Political rivals are required to sit together to provide political stability for economic recovery which will not be on track even with the assistance of IMF, WB, ADB and the Friends of Pakistan.

The present government can utilize the democratic dividends to negotiate a turnaround to make the coming year as the dawn of a new day. However, if the current stabilization concerns continue to overshadow the imperatives of a robust economic growth, the situation is likely to worsen. Government has to re-engineer the economy by shifting its focus to agriculture and manufacturing sectors from the next budget 2009-10.