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January 4, 2011

Political turmoil seen stalling economic reforms


January 4, 2011

KARACHI: Pakistan’s economy has again taken a backseat amid brewing political storm as the government is likely to spend more time in political wheeling and dealing instead of going for the crucial reforms, including expanding the revenue base and containing the fiscal deficit, analysts said on Monday.
“This is quite damaging. The next three months will now be spent on winning political support instead of pulling the economy out of crisis,” said Muzammil Aslam, a Karachi-based economist.
The Pakistan Peoples Party (PPP) led coalition government received a second major blow within a fortnight on Sunday when its major ally the Mutahida Qaumi Movement (MQM) parted ways, criticizing the recent raise in the petroleum prices. Earlier the MQM bitterly opposed the enforcement of the reformed General Sales Tax (RGST), which is a major condition of the International Monetary Fund (IMF) under its $11.3 billion Standby Arrangement.
Last month, another important government ally, the Jamiat Ulema-i-Islam-F, broke ranks with the PPP following the sacking of its minister from the federal cabinet.
Analysts say that the political turmoil is likely to hit Pakistan’s battered economy hard.
The IMF recently gave a stern warning to the government to control its rising fiscal deficit, which is expected to cross 7.5 percent mark against the target of 4.7 percent.
The government has already requested for a nine month extension in the IMF programme which had to end in December 2010 after the global lending agency stopped the disbursement of its sixth tranche due in July over government’s failure in imposing the RGST.
Former finance minister Dr. Salman Shah said that the fiscal deficit for the current fiscal year could exceed 7.5 percent, which must be controlled to keep the economy on track. “Next six months are important as the IMF would see whether the government is meeting the 4.7 percent target or not.”
He said uncertainty remains the biggest

threat to business. “The federal government and the provinces also need to trim their heavy expenditures for the countryís economic survival,” he said. “The government has to increase revenue, cut subsidies and all the extra expenditure, but it would become difficult when there is political instability,” Shah said.
Aslam, the economist, said that any failure to meet the IMF condition would leave a negative impact on other donors and investors.
“Fiscal deficit is a blanket term, they have to work on real issues like increasing tax collection, decide the fate of 10 million tonnes of wheat before the next crop arrives in March and solve the inter corporate debt,” he said.
“Itís a catch-22 for the government, on one hand it has to implement the reforms, but on the other they have been so politicised that they might keep lingering forever.”
According to Shah, all parliamentarians should develop a consensus to keep economy first in this time of crisis.
“The idea of a new government will only work if thereís a quick election followed by an early stability. Otherwise, the current setup must continue for the betterment of the economy,” he said.
Aslam agree with Dr. Shah that the government has taken certain bold steps which remained beneficial and must continue in time to come. “The government has reduced the current account deficit to half, imposed tax on luxury items and encouraged remittances. Even the reformed sales tax, after certain changes, would work well for the economy,” he added.

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