Political uncertainty impacts on several key macroeconomic indicators but particularly those sectors that relate to private sector activity, a premise that is backed by numerous global examples. Thus it came as no surprise that the immediate upshot of Nawaz Sharif's disqualification was a bearish market and the rupee eroded in value vis-a-vis the dollar. However, by the end of the day, the stock market index more than recovered its earlier losses on the back of institutional buying though the rupee value did not recover.
An explanation for the stock market recovery can be attributed to both internal and external factors - internal because the PML-N, the ruling party, is not calling for fresh elections, which would have fuelled further uncertainty. Instead the party had indicated that it would nominate a candidate for an interim set-up, to be followed by bye-election on the National Assembly seat vacated by Nawaz Sharif with Shahbaz Sharif as the candidate, who would then lead the party in the 2018 general elections. There are probably no takers on whether the same cabinet would not be reinstalled. The Supreme Court has directed that a reference be filed against former federal finance minister Ishaq Dar, given the 91 times escalation in his wealth within a short period of time, but has not disqualified him. Time will tell whether Dar would take the option to clear his name before accepting a cabinet position but based on his claim of 'not guilty' one may conclude that he would not only accept his reinstatement as the country's Finance Minister but also actively seek that position. Additionally, positive financials in the energy sector and auto sector may have contributed to the recovery in the stock market.
The external factor that no doubt also played a role in the stock market recovery is the decline in the international price of oil with Oil and Gas Regulatory Authority (Ogra) recommending a decline in domestic petrol and High Speed Diesel price by 3.67 and 5.07 rupees per litre effective 1st August; and an increase in the price of kerosene by 13 rupees per litre and of Light Diesel Oil by 10.01 rupees per litre. It is unclear whether the Ministry of Finance sans a minister can take a decision in this regard or whether some overzealous Finance Ministry official, aware that the PML-N government would be reinstalled this week, may unofficially seek Dar's advice on the matter. In this context, it is relevant to note that Marriyum Aurangzeb's statement was reported by the government news agency APP, and the report was disseminated to the media by someone's gmail address whose accompanying note exactly matched those that used to be sent by the Press Information Department (PID). Given that the gmail sender did not on-send any statements by members of the opposition does raise the distinct possibility that the email was sent by a PID official.
The rupee losing value in the open market may be attributed to a perception that Dar, under Shahid Khaqan Abbasi and Shahbaz Sharif, may not be allowed as free a hand as under Nawaz Sharif, and may be forced to abandon his flawed policy of keeping the rupee overvalued to understate his heavy borrowing from external sources, which has played havoc with the country's exports.
Investment decisions by the private sector (in industry and agriculture) are also affected during times of political uncertainty - plans for setting up new plants/purchasing inputs that would increase yield per hectare postponed and expansion of existing capacity delayed. Be that as it may, it is relevant to note that the Finance Ministry under Dar is held responsible for: (i) a decline in large-scale manufacturing output of some key industries (examples include steel products, electric tubes and bulbs) due to a punitive tax system, failure to improve business climate as reflected in Pakistan's poor rating in the ease of doing business index among other factors, with the growth rate of the sector attributed to those sectors that rely heavily on imports, for example, the auto sector; and (ii) a decline in output of major cash crops, including cotton due to failure to provide the required incentives which, in turn, accounts for transfer of area under cultivation from cotton to sugar leading to surplus sugar (sugar mill owners in this country consist of the Who's Who in politics) and given the decline in the international price of sugar the demand for an export subsidy. In other words, there is a critical need for a change in policy with respect to both industrial and agriculture sectors.
Thankfully, the Chinese Foreign Ministry has categorically stated that Nawaz Sharif's disqualification is an internal matter and that the investment game changer, the China Pakistan Economic Corridor, will continue as planned. One would hope for greater transparency in the CPEC projects than has been evident to date.
Dar's heavy reliance on borrowing not only from the foreign capital markets, and not terming it debt equity, as well as on foreign banks requires an urgent revisit. It is not clear whether the PML-N government would be able to reverse this policy given that 2018 will be an election year.
And finally, the stalled process, since 2015, of negotiating the National Finance Commission award needs to be strengthened and the Council of Common Interest be used to ease various concerns in the smaller provinces as required under the constitution.
Business Recorder would hope that with a change of Prime Minister, some major policy flaws during the last four years are revisited. This would not only be in the national interest but also in the political interests of the ruling party with general elections less than a year away.
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