What to expect from the new govt

In 1999, Nawaz Sharif’s government was toppled by General PervezMusharaf mid-way into its five-year term. Since then a lot has changed in Pakistan. Musharaf enjoyed eight years in power and is under arrest now. Benazir Bhutto, leader of the Pakistan People’s Party (PPP) and daughter of legendary Pakistani politician Zulfikar Ali Bhutto came back to Pakistan from self-imposed exile and was killed. Then in an unexpected turn of events Asif Ali Zardari became president. He led the country into the abyss of corruption, economic woes, militant insurgency and power and gas shortage.

After bleeding for five long years, the worst seems to be over for Pakistan. Nawaz Sharif is on course to become Pakistan’s Prime Minister for the third time. According to unofficial results, beating expectations and tough competition from Pakistan Tehreek-e-Insaf (PTI), PML-N has overwhelming majority in National Assembly. He should be able to get the required majority with the help of independents. Since winning the election, Nawaz Sharif is expressing his intentions to give top priority to the resolution of power crisis and Pakistan’s faltering economy. I feel that in this regard the new government will have the following political and economic outlook.

Political

Nawaz Sharif’s success also brings a new political chapter for Pakistan. He is set to re-align both internal and external policies which will have far-reaching consequences for the country.

On the internal front, Nawaz Sharif’s handling of the civil-army relationship will be closely watched. It is widely expected that the civilians will retake some of their lost ground. Army’s influence over Pakistan’s foreign policy should also subside though not completely. Nawaz Sharif does not hide his bitterness at being overthrown in 1999 and will ensure that history does not repeat itself. In this regard, General Kayani’s impending retirement will be an important litmus test. Nawaz Sharif has already mentioned that contrary to PPP’s government which continued to give extensions to the army chief, he will be inclined to offer the post to the next senior most army man.

Nawaz Sharif’s biggest challenge will come from the external front. Relationships with US, India, Afghanistan, Saudi Arabia and Iran will be closely watched. Historically Pakistan government under Nawaz Sharif has remained close with both the US and Saudi Arabia. Nawaz Sharif’s initial statements post-election have revolved around maintaining this trend going forward. The Iran-Pakistan (IP) gas pipeline will present him with an interesting challenge as both U.S and Saudi Arabia are not in the pipeline’s favor. Many believe the IP pipeline to be a lifeline for the faltering Pakistan economy, so Nawaz Sharif will have a difficult situation at hand. I believe project TAPI will get a new lease of life as an alternative.

Nawaz Sharif is most clear about his ambitions to forge better relationship with India. Indian Prime Minister Manmohan Singh has extended an olive branch by congratulating and inviting Nawaz Sharif for a visit to India. The invitation will help in mending some of the ill-feeling between the two nations. Kashmir, MFN Status, water disputes, Afghanistan – all these issues need resolution and one hopes that progress will be made on these under Nawaz Sharif.

Economic

Nawaz is seen as a conservative and pro-business politician who favors a free market approach. A better relationship with India can serve as a catalyst in reviving growth in Pakistan through trade and if Nawaz Sharif’s early actions are anything to go by, he seems fully committed to this cause. The MFN status that India has been seeking should be around the corner. This would ensure ample supply of perishable commodities in Pakistan and a much needed price relief to the end consumers.

As we are aware Nawaz Sharif initiated privatization of the insurance and banking sector in his 1st term; he might lean towards the privatization of the energy sector or involve business community in some capacity to tackle the issues of the power sector.  He may get rid of the ailing public sector enterprises (PSEs) by privatizing them. He is also credited with ending the state monopolies in airline, shipping and telecommunication sector.

With bulls already dominating Karachi stock exchange, the benchmark KSE100 index has crossed 20,000 points mark in the wake of the Nawaz led government. With KSE 100 gaining 49% last year it will not be surprise if it crosses 25,000 points mark by the end of year 2013. Knowing Nawaz government’s knack for heavy investment in infrastructure projects the biggest gains could be seen in cement and material sector.

Financing of large infrastructure can lead to higher fiscal deficit if expenditures on non performing public sector enterprises are not controlled. Also if the new government starts borrowing for current expenditures (includes subsidies, defense, debt servicing etc.) it will become a burden on the economy, as the additional debt does not increase repayment capacity. The responsibility of preparing prudent budget is given to Ishaq Dar.

Ishaq Dar also has an experience of negotiating the IMF bailout package for Pakistan during the Nawaz Sharif’s 2nd term. His past experience will play a significant role in negotiating another bailout package worth $5 billion to resolve the looming balance of payments crisis. This may happen as early as next month to service the upcoming IMF debt repayments. The Coalition Support Fund payment of $1.8 billion is expected to be made soon-after the inauguration of new government. This will help in bringing the current account in surplus. Additionally the inflow will allay any fears of a rupee collapse against the dollar.

Revival of FDI will also be high on PML-N’s agenda. While there is no denying of Pakistan’s potential, political instability and security situation has hampered inflow of FDI. However Nawaz Sharif’s government, as we know, is known for infrastructure development, openness to trade & investment (reducing taxes on international trade and easing regulatory barriers) and improving institutional quality. This and his government’s amiable relationship with overseas Pakistani business community and royals in Middle East will play a vital role in attracting FDI. The change of government in Pakistan will afford a fresh approach towards tackling the problem of insurgency in Khyber Pakhtunkhwa (KP) and Balochistan. PML’s government is expected to be more serious about tackling this problem than the outgoing government of PPP.

Last time when Nawaz Sharif was in power nominal interest rates came down from 19% to 13% and inflation cooled down from annual average of 11.8% to 5.7%. Nawaz government being pro-business would like to see the interests rate head lower from their present levels.  Especially with inflation at its lowest level over last 5 years and reduced pressure on the rupee will create conducive conditions for a rate cut. Nawaz Sharif, during his election campaign, also promised disbursement of small loans to small & medium businesses. The figure below shows that during his 2nd term each year the amount of advances increased to private sector. Private sector which has been subdued for last five years might see an uptick in its credit appetite. Moreover this will help SBP fulfill its mandate of reviving economic growth.

This time around you can sense maturity and conviction in Nawaz Sharif’s attitude. He sees this as an opportunity for redemption of his earlier mistakes. Would he be third time lucky is yet to be seen.