Pakistan’s new Prime Minister Shehbaz Sharif warned shortly after taking office, that his country will be posting “the largest budget deficit in its history” as international financial institutions remain wary of the country’s political conditions.
Sharif, who succeeded the ousted Prime Minister Imran Khan on Monday, accused his predecessor of “economic mismanagement” and that his government will do its best to put the economy back on track. That is easier said than done.
The new premier will be leading a short-lived government, as new elections are due in August 2023. Some in Pakistan call for even earlier polls. The time constraints thus will not allow for substantial and serious reforms that are needed to assure domestic and foreign institution.
Financial analysts say the Imran government was ousted by inflation. Over the past two years, due to the economic impact of the coronavirus among other things, Pakistanis saw the price of essential goods go up more than 15 per cent, a historic high.
That led to the State Bank of Pakistan raising its policy rate last week by 250 basis points to 12.25 per cent, the biggest increase in years. The Central Bank said the measure was necessary because of “a deterioration” in the outlook for inflation and the global tension, especially the Russian war in Ukraine and of course the standoff between Imran Khan and the opposition. The political tension in the country was pushing the inflation higher, the Bank said.
Its statement said last week’s wrangling between Imran Khan and his opponents “contributed to a 5 per cent depreciation in the rupee.” It also pointed to pressure from a sharp drop in foreign currency reserves. Reserves held by the central bank dropped by $728 million to $11.3 billion by April 1, compared with $16.2 billion on March 4, the bank said.
Pakistan is therefore, as the Central Bank clearly said, in dire need of a pause in the political tussle. The country cannot afford more of this tension. There is some sort of clarity today, which will obviously help in assuring international institutions such as lending bodies and credit agencies of the country’s ability to stand by its financial commitments. But for the long term, Pakistan needs a viable, substantial and realistic reform programme to bring the economy back on track and rein in spiralling inflation.
The new government, with an experienced administrator at its helm, needs to ensure that this is a national priority. It may not have much time to achieve such a goal. But it can get the process rolling, which begins with political stability.