Managing the economy

We are finally there: a new elected government is in place and a new economy czar has been anointed. The surprise choice for the finance minister’s portfolio, Muhammad Aurangzeb, is a familiar face among global banking and finance circles. His selection reflects the no-nonsense approach to economic management the coalition government has decided to take, which is a good omen. A Wharton alumnus who most recently headed Pakistan’s HBL, Aurangzeb has previously been associated with prestigious global financial services brands as a top-tier executive and is probably the only Pakistani executive to sit on the Dow Jones’ influential Global CEO Council. But probably the best thing about Aurangzeb is that he has zero political pretensions to distract him from the job on hand because he will have no constituency to serve except the cabinet as he tackles the convoluted task of putting Pakistan’s economy back on the rails.

The new finance minister has his job cut out for him: jumpstart the stalled engines of the domestic economy to put it on a path to sustainable growth. There is no reason why a healthy, growing economy should not be able to return a positive current account balance and service its debts, which should in turn strengthen the currency and put the brakes on inflation. There is no doubt that Pakistan’s real economy is in tatters after years of mismanagement and stagnation, and it will take more than band-aids to get back into shape. Equally, the county’s unsustainably high external debt is a huge drain on what little resources the sputtering economy can generate, leaving the nation at the mercy of the global financial markets. Aurangzeb will need to find and implement innovative ways to effectively manage the debt burden.

Fiscal consolidation is another key challenge the new finance minister will have to face in the course of his job. This will involve both bringing government spending under control by cutting the rot and keeping unfunded subsidies at bay and increasing revenue by broadening the tax base and improving collection. Bringing the rent-seeking farm and retail sectors under the tax net are two long overdue steps in the right direction, as is the task of oiling the wheels of the snail-paced privatization program. His biggest test will be boosting exports by creating a business-friendly environment to attract foreign investment with a strong focus on foreign direct investment. Pakistan’s general economic policy direction has been right through the last two short-lived governments, although progress has been slow on account of the very nature of those governments and the political challenges that beset them. Aurangzeb’s job will be to maintain that policy direction and accelerate progress. The government will no doubt have a hard time juggling competing priorities like a central bank insisting on monetary tightening and an electorate begging for easy money. The finance minister would do well to mind his turf when throwing around his weight in such matters. In particular, he must remember dictating monetary policy is strictly off-limits for him.

In the final reckoning, however, his success in arriving at and implementing the right policy mix will not only entail a whole-of-government approach but also require close cooperation between all stakeholders including the government and the private sector and strong political ownership by Prime Minister Shehbaz Sharif and his political coalition. Equally, the finance minister will be constrained in his job by other exogenous factors like the global economic slowdown and the evolving geopolitical situation. Given his experience as a top-flight banker, Aurangzeb cannot be oblivious to how the headwinds the global is facing can impact Pakistan’s exports and foreign investment or how the ongoing regional conflicts can affect the country’s trade and investment. One hopes he can find strategies to effectively cope with these and other challenges facing him on the job.