Have circumstances boxed PML-N in?

Economic conditions will remain tight for the next year. With shaving off energy subsidies, pain will be felt by households and small and medium businesses alike. Last week’s increase in the petroleum prices is just the beginning of a tough journey.

Many more adjustments are to come. Economic growth will significantly slow down. Inflation shall remain high while unemployment will grow. Longer the government stays, dimmer are the prospects for Pakistan Muslim League-Nawaz (PML-N) to win the next elections. It seems as if PML-N is boxed in.

There is a theory that since the government has increased the petroleum prices (have taken the toughest step so far), Pakistan Democratic Movement (PDM) is going to last fill the end of term.

The premise is that the government would be able to stabilise the economy and move it back to growth track in 12-15 months. That is not how economies behave. Just like it takes time for tightening measures to slow down the economy, it doesn’t pace up in a jiffy. Those who are proponents of governments staying for full term are dragging PML-N into quicksand. Longer they stay, harder for the party to come out.

It’s a political paradox. Imran wants immediate elections as he thinks that PTI’s popularity is at its peak. PDM, too, thinks so. That is one reason for the government delaying elections. But they are ignoring the negative externality for the sitting government (mainly PM and FM) who will lose credibility and popularity in the process.

The problem is that PDM is a weak coalition with conflicting interests. PPP has nothing to lose. They are happy to stay and let the young Bilawal groom and enjoy the power. There is a visible divide in the PML-N camp. Nawaz is not keen on sticking around. However, Shehbaz and some other PML-N leaders are enjoying power.

In short, PPP is the net beneficiary if the government stays till assemblies complete their term while both PML-N and PTI may lose.

It’s a complex situation. Then there is mistrust at various levels and amongst various stakeholders. PML-N has a history of mistrust with the powers that be. This trust deficit still persists. Lately, Imran is also not willing to trust the powers that be. Then PML-N London and Lahore factions have frictions. And PPP and PML-N have a long history of being arch-rivals.

The current setup is not a natural equilibrium. It’s a kind of unstable equilibrium in which a small disturbance can bring about a huge change. Anything can happen in the next few weeks. Right now, the singular focus of the powers that be is to stabilize the economy and avert the default-like situation.

Precious three months are being lost by dilly-dallying with the International Monetary Fund (IMF). Pakistan’s international bonds are trading at a steep discount. And there was a fear of a free fall in the currency. If that happens, it’s near impossible for anyone to stop.

The economic crisis Pakistan is facing in 2022 is not out of proportions (in terms of SBP foreign exchange reserves to current account ratio) as compared to the crises in 1998, 2008 and 2018. One variable that makes it unique is that no political party is ready to take the onus of economic hardship. When PTI smelled conspiracy it shifted the burden to PDM; while PML-N’s top leadership in London wants to shift this burden on to caretakers. This political ‘impasse’ has created a fear of default.

Last straw that broke the camel’s back was the IMF’s statement of declining resumption of programme without increasing petroleum and electricity prices. The process has begun. Petroleum prices have now been increased by Rs30/liter. Expect another increase soon. And to be followed by more jumps in June. Expect a sharp increase in electricity bills in July. Fuel cost is too high. Power is being produced at rates ranging from Rs 24 to Rs 36 per unit on LNG and furnace oil.

Fuel cost adjustment (FCA) that averaged at Rs 4/unit in the past six months is expected to be over Rs 7/unit in May which would be applied on July’s bills. This would increase the electricity bill by around 15 percent. The problem is graver in Karachi where K-Electric’s FCA is expected to be around Rs 10-11/unit — an increase of 25-30 percent in bills. Many SME businesses would not be viable at such a high cost. Households would find it extremely hard to manage monthly budgets with increased spending on fuel and electricity.

Then the budget must be tough. Tax exemptions shall be removed. Petroleum Levy (PL) may also be re-deployed. New taxes may be imposed. Monetary policy would continue to be tightened. Virtually all the big companies are expecting flat or negative growth in volumes next year. Businesses will make less money and jobs may be lost. This would be on top of high inflation which is yet to peak.

It is increasingly clear that the next 12 months for the sitting government would be extremely hard. The economic challenges for common man will provide enough ammunition for IK to mobilise a march in July (or later), if general election’s date is not announced in June.

Are there indications that government’s days are numbered? The government is hurriedly passing bills. The PM’s speech on the weekend was dull. The good news, however, is that the IMF programme will be revived and economy shall be slowly moved towards stabilisation path. That is the first step. It remains to be seen how the political situation shapes up post-budget and what the ramifications will be on the economy.

Copyright Business Recorder, 2022