Pakistan’s new PM facing a stern test on all fronts

PAKISTAN’S newly elected government will be facing a stern test in the coming months on all fronts.
The new democratic government will be confronted with a grappling energy crisis, weak balance of payments, chronic circular debt issue and crumbling public institutions.
Failing to overcome these issues will be potentially dangerous and which may stir social unrest and lead to political instability. Although the Sharif-led government is not too keen on knocking the doors of IMF and other global donor agencies to seek billions of dollars in additional loan, economic realities present a bleak picture.
Compared to $ 14 billion almost two years ago, Pakistan’s foreign reserves now only stand at around $ 6.4 billion. The reserves are sufficient only to cover the country’s import bill of one and a half months.
At the same time, the country is facing a severe balance of payments crisis and other weak macroeconomic signals. News reports of Saudi Arabia willing to extend a $ 15 billion bailout offer to Pakistan have been quashed as mere rumors. The deal would have allowed some breathing space to Pakistan’s ailing power sector and supported hopes of an economic comeback by the country. To make matters worse, debt payments to IMF of about $ 2.5 billion will become due by the end of this calendar year and place additional pressure on the foreign exchange reserves.
Under such conditions, the government may be forced to make the hugely unpopular decision of approaching the IMF for a new bailout package, which would enforce stringent conditions and push for a complete overhaul of the economy. The new loan conditions would aggressively call for removal of all subsidies on energy, broadening the tax base and overhauling the state-owned enterprises.
However, any further increase in business cost would dampen growth and render local industries uncompetitive in the export market. Plagued by severe energy shortages, the economy has failed to increase its output and maintain a growth momentum.
The war on terror has also bruised the country’s investment climate and scared away foreign investors from the scene. During this fiscal year, foreign investment is expected to be only around 0.5 percent of the country’s GDP. To break free from the debt trap, Pakistan needs to enhance its revenue generation capacity, foreign exchange reserves and export earnings.
Despite these grave challenges faced by the country’s economy, some quarters believe that US and other close allies will not abandon Pakistan in such tough times. Pakistan remains a key route for the withdrawal of US-led NATO troops from Afghanistan in 2014. An economically and politically sound Pakistan is very important to combat the threat pose by militants in the region and ensure that an internal crisis does not plague Afghanistan after the withdrawal of coalition forces.
The strategic importance of Pakistan is likely to help it in securing an economic bailout without much dictation to pursue a strict reform agenda. Nevertheless, political forces in Pakistan must themselves assume the responsibility to help the country overcome its poor economic shape and preserve peace so that greater economic activity may spur sustainable growth.