Path of maximum uncertainty

The market’s given a roaring farewell to the coalition government (up about 20pc since the SBA) but – write this down somewhere – there’s simply too much uncertainty on at least three important fronts to bet on this joyride continuing too long into the caretaker setup. Remember the 9-month IMF program does not end the threat of default; far from it.

It only improves the chances, ceteris paribus, of going one more fiscal before it can no longer be kept off the table. So, unless somebody takes the trouble to explain unknowns in political-constitutional, economic-financial and security-terror matters as the interim administration takes office, the market could, and most likely would, quickly start expressing serious doubts about the prospect of coming out strong on the other side.

It’s clear that somebody, for some reason, wants the provisional setup to be less temporary than the rules allow. Going into a caretaker government because the constitution says so, despite the extreme fragility of the moment, and then violating the same sacred document by defying the 90-day deadline makes no sense at all.

What could they possibly expect an unrepresentative government for an extended period to deliver that an elected one after a timely election cannot? It has to be something more than holding the election – the only constitutionally mandated duty of the caretaker setup. If there are no answers, there will be more uncertainty.

Surely nobody buys the bit about the census. This issue had been festering for years and merited extensive debate between fiercely disagreeing political parties. Yet the PM pulled it out of the hat just days before his government was scheduled to leave and that was that.

The only thing they said about legislation — always undertaken after fresh delimitations – was that it will not be needed this time. Now they’re openly talking about delaying the election till at least March next year, planting the seeds for more controversy and uncertainty down the road.

And what do they even mean by the line that it’s because of the economic-financial situation, especially the IMF program? It’s dangerous enough that the country is going into a temporary setup with very limited powers in the thick of a make-or-break bailout program with very harsh conditions, but why does the entire facility need to be overseen by the caretaker government; for which they had to legislate to enhance its powers (in another controversial move that upset even coalition partners)? What’s wrong with holding the election on time and letting the new administration take it to the finish line?

Stakeholders, especially in the business community, are pretty apprehensive about the caretaker government handling the IMF program. The EFF (Extended Fund Facility) collapsed because the government was unable to fulfill all its harsh upfront conditions – structural adjustment, etc. — which are now incorporated in the SBA.

The State Bank of Pakistan (SBP) might already have caused some trouble by keeping rates stable in the last MPC (Monetary Policy Committee) meeting even though the Fund clearly demanded a more hawkish monetary policy.

So, how far will a government with little authority be able to go in order to take very tough decisions? What if the next tranche runs into trouble — remember the roadblocks and disappointments of the EFF? — and more savage tax increases and subsidy cuts are needed? What happens if the temporary setup lasts longer than April, when the SBA expires, and another program needs to be negotiated? What if this program, just like the EFF, also fails? Why are there no answers to the most important questions? And who’s responsible for the uncertainty because of so many questions and so few answers?

Then there’s the security-terror factor, of course. The government put its foot down, finally, in its last few days and warned Kabul of serious consequences if TTP wasn’t reined in. Outgoing foreign minister Bilawal Bhutto said very clearly that “We will act under international law to defend ourselves.

If the Afghan authorities don’t act, then action inside can be one of the options but not the first option”. And the military has also ruled out any further negotiations with the “khawarij”.

Interestingly, the Taliban supreme leader Hibatullah Akhundzada, has decreed all cross-border attacks as “war, not jihad”. But is there a contingency plan if they go back to their old position of denying everything? Are we jumping into a period of weak government with just the hope that the western front will stay calm? Or will the interim government suddenly give itself the powers to deal with a hot border situation if things go bad?

Markets hate uncertainty even more than bad news; which is priced in rather quickly. And there’s nothing quite like doubtful political, economic and security conditions – that too at the same time – to make investors and lenders alike rush for the exit lounge and give the kiss of death to the economy.

Still, Pakistani authorities seem to have set it on the path of maximum uncertainty; with little justification and none of it credible.

This would have been problematic in the best of times. And here we are, with record inflation and unemployment and nothing less than the threat of sovereign default, the most bitter political environment in history, and rising incidents of terrorism that could well snowball into the nightmare of a few years ago. And we expect an unelected government for an uncertain period to lead us out of our troubles and into the next election.

Copyright Business Recorder, 2023