Cost of the turmoil

All leading economists regard political instability as the most serious malaise that can afflict an economy. Unfortunately, Pakistan’s economy is paying the heavy price of a continuing political instability which has shaken the confidence of businesspeople and investors.

The Shehbaz Sharif-led government, despite all its claims, has failed to give confidence to the jittery markets which fear that the bombastic claims of Finance Minister Ishaq Dar amidst superfluous window dressing measures may create a short-term illusion of economic revival, but would leave the economy in more battered shape.

Unfortunately, this time around even the window dressing measures are not being able to do the trick. Against the backdrop of slowdown in economic activities, low growth and massive flooding, a soaring inflation has emerged as the biggest challenge. CPI inflation in October clocked in at 26.6% — much higher than the market estimates.

The benchmark KSE-100 index marked 3.0% returns by the third week of October. However, these gains were all wiped off amid the rising political temperature. This led to equity market losses at 7.5% since the beginning of the year.

The large-scale manufacturing also declined by 0.4% in the first two months of the current fiscal year. The textile exports — which act as lifeline for the economy as the highest foreign exchange earner and highest urban employment provider — also declined 16.5% in October.However, some macro-economic indicators reported relatively encouraging data last month. In October, the Current Account Deficit clocked in at 17-month low on the back of temporary administrative controls on imports.

The stock market also showed some encouraging signs such as higher turnover and somewhat indifference to the day-to-day political drama. However, the continued political instability would likely lag the long-due re-rating of the local bourse, where lower market participation cannot be ruled out.

Politics mostly influenced investors’ sentiments and economic performance. The turmoil kicked off with the ouster of Imran Khan through a Vote of No-Confidence, which was accentuated by the latest ruling of the Election Commission of Pakistan that former Imran Khan and his party had violated campaign finance rules, a finding that could lead to his disqualification from electoral politics.

Importantly, two key developments including Imran’s long march towards Islamabad, and the appointment of a new army chief due in November have kept the investors nervous and markets jittery.  Thursday’s gun attack, in which Imran Khan got wounded, has dampened their spirits further.

The economy has now become the main force driving voters’ sentiment. This is evident in the losses the ruling coalition suffered in the recent by-elections across the country.

As the economic situation worsens, the average citizen is suffering under the weight of the IMF-mandated removal of energy subsidies and other measures besides unbridled inflation and steep depreciation of the rupee against the dollar.

The political uncertainty is affecting the local investment climate, which all the companies and high-net-worth-individuals consider while deciding to start, expand, or contract their businesses.

The government has stated that the country will need around $5.0 billion by the end of FY 2022-23 on top of the IMF loan to bridge the budget deficit, but nothing has come so far.

Analysts say that time is running out fast, and the country needs political stability and a consistent, rational economic policy on war footings just to stay afloat. Business community as well as the general public are apprehensive about the future of the country under the stewardship of Shehbaz Sharif, who is seen lacking the legitimacy to rule the country.

Currently, there appears no light at the end of the tunnel as the government despite its growing unpopularity and inability to address Pakistan’s key challenges, wants to hang on to power. This means continuing political instability and mass discontent.