The economy and political uncertainty | Political economics


Eeconomic activity declines when there is uncertainty. A climate of uncertainty negatively affects consumers, businesses, investors, financial markets and, above all, economic decision-makers. They are forced to make short-term policies in a shortened horizon that are sub-optimal.

Like most developing countries, Pakistan faces great uncertainty. Arguably, these uncertainties, mainly due to chronic political instability, have hampered Pakistan’s economic growth the most. The political constraints in these circumstances have led to short-term macroeconomic policies and more frequent policy changes than desirable.

A cursory look at the past two decades of economic policy-making in Pakistan, for example, will reveal that most of the economic policies that opposition parties opposed were policies that they themselves had attempted to implement. work when they were in power.

Let me give you a few examples of how the political economy of economic policy-making negatively affects our economic performance. The Circular Energy Debt (ECD), which over the years has accumulated up to 2.6 trillion rupees (equivalent to the defense budget over two years) originates from the provision of energy ( oil, gas and electricity) to consumers, due to political constraints, at tariffs below the cost of importing, generating and distributing electricity.

In the run-up to the 2008 general election, when international oil prices doubled (from $55 to $110) from January 2007 to March 2008, the Shaukat Aziz government raised domestic prices by only 9%. The impact of oil prices has also not been passed on to consumers.

International oil prices continued to rise in subsequent years. By 2011, Pakistan had reached a stage where the electricity sector needed Rs 3 billion per day to purchase fuel, while collection from consumers was less than Rs 1 billion per day. The low collection was due to low tariffs as well as electricity theft. The result was that private power generators stopped producing electricity due to lack of cash, and Pakistan experienced unprecedented load shedding from 2008 to 2013.

The PML-N government (2013-2018) fulfilled its energy manifesto by ending load shedding thanks to Chinese investments in the electricity sector under the CPEC. When world oil prices fell to a record high of $20-30 a barrel, the government had the opportunity to reduce the EAD by keeping the electricity tariff above the cost of production. He chose not to. Instead, there was an increase in EAD, thanks to the “capacity payment charges” the government had to pay independent power producers for not buying enough power from them.

The PTI government took the unpopular step of reducing ECD by requiring consumers (except vital consumers) to pay the cost of power generation. However, he did not find implementing the decision easy in an unstable political environment. The Prime Minister has repeatedly rejected OGRA/NEPRA recommendations for an increase in gasoline/electricity prices (resulting in an increase in EDC).

World energy prices are rising amid the Russian-Ukrainian crisis. However, domestic prices have been frozen until June 30. The popular relief of the masses will come at the price of the accumulation of ECD.

Like ECD, the deterioration of public sector enterprises (PSEs) can also be attributed to chronic political instability. Political appointments were a factor in mass casualties. Successive governments have failed to privatize them due to political opposition to the layoffs and opposition allegations about the lack of transparency in the privatization process.

The IMF is awaiting the outcome of the no-confidence motion against the Prime Minister to determine the next steps for its seventh review mission. The outcome will determine who the IMF engages with on critical structural benchmarks.

The Supreme Court has thwarted attempts by the Shaukat Aziz government to privatize Pakistan Steel Mills. The PPP government’s efforts to privatize have met with resistance from the PML-N and the JI. The PML-N government’s efforts to privatize failed due to opposition from the PPP, JI and PTI. The PTI government has been criticized for its privatization plans by the PML-N, PPP and JI. Consequently, loss-making ESPs remain an ongoing problem. The World Bank estimates the total liabilities of loss-making PSEs in Pakistan to be between 12 and 18 percent of GDP.

The collection of value added tax and documentation of all sectors of the economy is another issue that has become politicized. The PPP government attempted to introduce it as a General Sales Tax (RGST) reform, but had to scrap the idea due to fierce opposition from traders and the PML-N.

The PML-N government also attempted to introduce the RGST but failed. The current government, acting through a mini-budget, introduced a flat GST rate by removing most sales tax exemptions. However, he has faced stiff resistance from opposition parties who have promised to revoke some of the measures taken in the mini-budget as soon as they come to power.

The amendment to the State Bank of Pakistan Act was also opposed. The PPP and PML-N governments had previously amended the law twice each under IMF conditions. The PPP and the PML-N opposed the amendments made by the current government and pledged to reverse them.

The support price of wheat, the maintenance of artificially high exchange rates, the manipulation of the State Bank’s key rate, the delay in entering an IMF program and general energy subsidies are all examples of actions taken by governments under political pressure.

Pakistan has again been hit by heightened political uncertainty which is having an economic impact at both macro and micro level. The IMF is awaiting the outcome of the no-confidence motion against the Prime Minister to determine the next steps for its seventh review mission. The outcome will determine who the IMF engages with on critical structural benchmarks and quantitative targets under the current Extended Financing Facility program.

Pakistan has asked China to refinance its debts and deposit an additional $10 billion in the State Bank of Pakistan to bolster its foreign exchange reserves. China, too, is awaiting the outcome of the vote of no confidence before responding to Pakistan.

The government is busy managing the current political crisis. He postponed scheduled cabinet meetings for the fourth consecutive time. Important decisions are made through “circulation” that lacks the benefits of threadbare discussions in face-to-face meetings.

It can be argued that it is due to the continued political instability that the government has not been able to focus on strategies to counter the commodity price super cycle and the energy crisis that is brewing in the following the Russian-Ukrainian conflict.

The opposition is also under pressure in its choice of positions on economic issues. The promise of lowering the prices of food, fuel and dollars is clearly unrealistic. Whoever wins parliament next week will have to live with a global rise in commodity prices and a possible global recession.

The politicization of economic issues has not served the country. It is necessary that all political parties, both on the side of the Treasury and those of the opposition, and the powers in place reach an agreement on the formulation of a medium-term macroeconomic policy framework.

All parties involved should come up with pragmatic solutions to the economic challenges facing our country instead of issuing utopian wish lists. Once such a medium-term macroeconomic policy framework is agreed, the opposition should allow the government to implement it without opposing it. When its opponents come to power, today’s ruling party should also be ready to support them in implementing the agenda.

A quick end to political instability in Pakistan is unlikely. However, sincere efforts by all who matter can reduce the adverse effects of political instability on economic growth. It’s time to act.

The author directs the Sustainable Development Policy Institute. He tweets at @abidsuleri

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