The urgent and important

Mian Nawaz Sharif assumes power facing a sea of challenges. He realises how crucial yet difficult it will be to steer the ship of state through these choppy waters and take the sinking economy to safer shores. He has before him the lesson of May 11: the punishment voters inflicted on the PPP for non-performance. He may want quick policy wins. But his public statements acknowledge there aren’t any and it will take time to address Pakistan’s problems especially ending the chaos of power shortages that he has rightly made his top priority.

The incoming prime minister will nonetheless be expected in his first address to the nation to set a clear direction and road map of where he wants to take the country. This will also be a measure of whether he will, early in his tenure, take the tough decisions warranted by the dire economic situation. The approaching budget will be the earliest test of his commitment to reform.

Nawaz Sharif starts with several advantages his predecessor never enjoyed: a comfortable majority, credibility, public goodwill and control of Pakistan’s largest province. But he also faces a national landscape vastly transformed since he was last prime minister 13 years ago. The environment has changed in ways that could help or hinder Sharif in governing. These changes include:

• An activist judiciary intent on guarding its independence and serving as a check on arbitrary executive actions. Nonetheless with a strong popular mandate, Sharif can expect a honeymoon period with the judiciary.

• A vibrant, hyperactive broadcast media which has, in recent years, acted vigorously to hold incumbents to account and act as ‘opposition’ to those in authority.

• Under a non-interventionist army chief, a long powerful institution has sought to extricate itself from politics to rebuild its reputation while publicly committing to support the democratic process.

• A regionalised election outcome that has left two of four provinces in opposition hands. Fortunately for Sharif the ruling parties in these provinces have a national, not parochial outlook.

This complex environment can enable or inhibit Mian Sahib depending on how well he manages the centre-province dynamic and relations with the judiciary and the army, both of which will see leadership transitions in a few months. His stance on Balochistan’s government formation marks an impressive first step on the former count.

But his sternest political test will be to stabilise and revive the economy. He has already shown urgency in seeking a strategy to deal with the crushing power shortages that stand today as the biggest impediment to growth and investment, and the cause of unprecedented and mounting hardship for people.

In confronting these challenges, Mian Sahib will have to deal with both the urgent and important. This means evolving policy responses to immediate issues while laying the foundations for longer-term, lasting solutions.

Economy. The country’s present economic troubles reflect chronic unaddressed problems. Unless underlying structural issues are tackled, the country will not be able to escape from the trap of low-growth, little investment, high deficits, more borrowing and rising inflation. A piecemeal, Band-Aid approach is not sustainable.

The most proximate risk comes from the country’s precarious balance of payments position, with foreign exchange reserves depleting and repayments looming on external debt. By end June, reserves held by the State Bank could dip to around $5 billion. Forty percent of these are what are called forward/swaps. If the central bank is unable to roll these contracts over, reserves could plunge to a dangerous level. This could result in a replay of the 2008 balance of payments crisis.

To avert this, urgent action is required. The debate apparently raging in PML-N circles about when and if to approach the IMF for emergency financing should be informed by the fact that if Pakistan cannot meet its external financing requirements in coming months it is far preferable to go to the Fund before a crisis emerges than when one becomes imminent. Efforts at finding ‘alternate financing’, even if successful, will only buy time. But delay is not a strategy. Nor will this strengthen the government’s negotiating hand, as some argue.

Any future IMF programme should however be a part of, not a substitute for, a wider home-grown strategy. Stabilisation measures are necessary to create an environment to revive economic activity. More important are measures to spur growth and fix structural problems to end the vicious circle of high budget deficits and chronic financial crises that have led to repeated IMF bailouts.

The incoming government should frame a strategy that addresses the source of all fiscal problems – low tax-to-GDP ratio – by raising revenue. Empowered by a decisive majority, the new government has an extraordinary opportunity to launch structural reforms to put Pakistan on a higher growth trajectory. This should not be squandered under pressure from the self-interested who have been warning Sharif against significant tax reforms. The newspaper advertisement published last week by the Pakistan Business Council is a sad reflection of this.

Reforms that dismantle the regime of concessions and privileges would instead win Sharif greater public support – and raise substantial resources. Central to this is eliminating the SRO regime, which costs the economy billions in lost revenue and hinders a level playing field for business. This will send the strongest signal that the new government will not use public resources to protect special groups but act firmly in the broader public interest.

Energy sector reforms are Sharif’s most urgent priority. But this requires tough decisions involving tariff changes and phasing out untargeted subsidies to achieve full recovery within a specified timeframe. A comprehensive strategy also entails dealing with interagency debt, restructuring and eventually privatising power generation and distribution companies, converting them to lower cost fuels, and reforming the natural gas market.

Education merits priority, as it is both urgent and important. Economic progress is impossible without investment in human capital. Pakistan’s demographic transition (the working age population is expected to double in 20 years) can turn into a disaster if educational opportunities are not provided to young people entering the job market in unparalleled numbers. The scale and quality of education has to substantially expand, a serious target has to be set to accomplish full primary enrolment and higher enrolment in secondary and university education. Investment is also essential in technical training and skills development.

A national security strategy must be evolved to integrate what are separate economic, internal law and order, defence and foreign policies into a coherent and disciplined pursuit of clearly articulated national goals. For the first time the country should be run with such strategy and the appropriate policy mix to attain the strategic objective of a secure and economically resilient Pakistan. This will require identifying priorities and devising institutional arrangements to coordinate this strategy.

Economic revival is not possible without securing the country against internal threats from militancy. The current popular narrative of ‘talk not fight’ is seductively simple but any dialogue should proceed according to a) clearly defined parameters, the law and the constitution; b) experience and fate of past peace deals; c) careful assessment of whether militant demands are negotiable and d) renunciation of violence by militants before talks commence.

The response to extremist violence must be backed by political consensus and public support and avoid the fire-fighting character of past efforts. Space does not permit fuller exposition of such a strategy especially of the entire spectrum of threats and external challenges that the country faces. Nor is an appraisal possible here of the kind of foreign policy needed for this phase of economic consolidation and securing internal peace and stability. This will be addressed in a later column.

Few, if any, of the priority actions that Mian Sahib will have to choose from to address Pakistan’s economic, energy and security challenges are pain-free. But he must also know he has a unique opportunity to implement reforms and take bold corrective actions to extricate the country from its ‘crisis state’ and make an enduring contribution to Pakistan’s future. This moment is for him to seize.