After weeks of political turmoil in the country that led to a constitutional crisis and culminated in the removal of Imran Khan from the office of Prime Minister, Mian Muhammad Shehbaz Sharif has taken his place at the head of the most elaborate coalition government in the history of Pakistan.
As the dust settles and he prepares for his first day in the Prime Minister house from tomorrow, Mr. Sharif’s first speech in parliament as the leader of the house was dominated by themes of fixing the country’s ailing economy.
The Prime Minister’s speech was heavy on rhetoric of reconciliation, unity among the coalition government, and better economic and diplomatic ties with Pakistan’s allies. Laced with this rhetoric was criticism of the previous government, and some indications as to possible economic policy shifts that might come with the new government.
Profit looks at the key economic takeaways from the newly incumbent Prime Minister’s speech in the National Assembly.
Dollar prices, deficits, and IMF talks
One of the first points raised by Shehbaz Sharif in his speech was the stabilization of the dollar in the wake of the no-confidence vote against Imran Khan. The dollar has gone down to Rs 182 after it hit a high of Rs190 last week due to the cloud of political instability that was looming over the country.
There will be a close eye on the rupee-dollar parity. The rupee’s historic weakness over the past year in particular had caused great grief to the PTI’s financial minds since it meant imports were becoming more expensive. And since Pakistan’s largest import (40% nearly) is fuel, which is an inelastic import and cannot be substituted, the trade deficit continued to rise.
Because of the increasing price of the dollar, paying off Pakistan’s debts also becomes more difficult, which in turn contributes to the budget deficit.
It is important to note here that Mr. Sharif did not at any point make promises about the further decline of the dollar. In the days to come, keeping hold of this coalition will not be easy, and with the PTI officially playing the role of agitator, moments of stability will be far and few in between. However, while talks with the IMF have been on a halt, the fund is on the record saying it will talk to the new government – which means if the programme is completed and reserves rise, the State Bank may be able to stabilize the rupee-dollar parity to try and control the economy getting out of hand in the short-term.
Inflation, purchasing power, and unemployment
The new Prime Minister was impassioned in his diatribe against inflation, railing against the previous government for what he claimed was a bungling of the economy. “If we are to save this sinking ship and look after the working classes there is only one solution – unity, unity, and unity,” he said in his speech.
On this front, in addition to general discourse about turning Pakistan into a “paradise for industry” and uplifting workers, Mr. Sharif announced a minimum wage to be increased to Rs25,000 from April 1, the availability of wheat at a reduced price under a Ramazan package. He also introduced the reintroduction of the Benazir Card as a poverty alleviation measure.
However, the challenges are very real and very difficult. Inflation measured by CPI has been at an all time high over the past couple of months, driven by a record rise in energy prices and food rates undermining earlier gains. And this is not a problem that is going to go away anytime soon, not even with a change of power at hand. The global economy is facing three challenges including financial sanctions, commodity prices and supply-chain disruptions
Food inflation is still on the higher side in the last nine months; in urban areas, it shot up by 14.5pc year-on-year in March and 1.8pc month-on-month, whereas the respective growth in prices in rural areas was 15.5pc and 2.3pc.The PBS data show that food inflation is still on the higher side in the last nine months; in urban areas, it shot up to 14.5pc year-on-year in March and 1.8pc month-on-month, whereas the respective growth in prices in rural areas was 15.5pc and 2.3pc.
Fuel prices, LNG, and electricity prices
Petrol: The rising prices of petrol have been a major sticking point and issue of discontent among the Pakistani masses. One of the last economic measures taken by former Prime Minister Imran Khan was the subsidy on food and fuel that set the price of petrol at around Rs 150/per liter. One of the immediate concerns about this subsidy was that it was across the board and not targeted, which meant that with international prices surging the actual price should be somewhere over the Rs200 per liter mark.
However, the new coalition government is lucky in the sense that international oil prices have gone down the very day that they have come into power. As CNN reported, crude futures are tumbling yet again, sinking nearly 3%. After nearing $140 a barrel in early March and topping $120 as recently as two weeks ago, Brent futures have fallen in nearly a straight line and now sit just a hair above $100.
Despite what might seem like respite on a global scale, prices in Pakistan are most likely set to increase. The subsidy on petrol right now is expensive and not sustainable. Removing it will mean petrol prices go up, especially since the government will want to add tax to it as well given the historic budget deficit that they will face in July when the new financial year begins. The government will be on a quest to gather as many taxes as possible and reduce spending – which can only be done by getting rid of the subsidy and taxing petrol. Their best bet in this situation would be a massive restructuring of the subsidy to turn it into a targeted subsidy.
The problem will continue to dog the new government, and as a report by BR Research has pointed out, recent figures for petroleum product sales by the oil marketing companies – released by the OCAC – show that demand for petroleum products remains strong. This means that imports are on the rise, the import bill is swelling, and foreign exchange reserves are going down.
Electricity:
Another major area of criticism levied by Mr Sharif against his predecessor were the increasing prices of electricity. Mr Sharif said that in his party’s previous stint in office between 2013-18, they had focused on cheap sources of electricity including LNG while the incumbent government imported expensive furnace oil. While this was because of an international LNG shortage, what must be said is that the PTI government badly bungled the LNG supply chain, failing to get LNG contracts on time or even beginning work on a third LNG terminal in the country.
At the same time, he fuel stock situation for power generation is likely to aggravate in the country as the PTI ousted government did not release Rs25 billion to the Pakistan State Oil, required to open LCs for importing diesel and furnace oil in the wake of failure of Pakistan LNG Limited to ensure the import of LNG for power sector – as reported by The News.
Conclusion – why the politics will matter
Pakistan was already going through dire straits. As the new Prime Minister has pointed out repeatedly in his speech, this is a sinking ship. The last throes of a sinking ship are rarely the right time for the crew of said vessel to make a change in captain. This means that the new government will have to toil and trouble to try and stabilize the nation’s economy.
Shehbaz Sharif finds himself in a position where there is no political room to make unpopular decisions and no economic room to make popular decisions. At such a time, the slightest political turmoil could make this cobbled together government collapse in on itself – especially with Imran Khan gone rogue. A likely outcome of this will be the country going to elections early, but before that the question will be whether or not the government will be able to take some hard decisions and finish talks with the IMF.
The country is balanced precariously on a ledge. The rocks are slipping under our feet and the commotion from the political unrest is nowhere close to being solved. It will take a lot to cool things down, let alone go towards a solution.
