The formation of a new government under a PDM 2.0 setup seems imminent, with Shehbaz Sharif of the PML-N likely to become Prime Minister. The stock market has reacted positively to this prospect, gaining 1000 points lost by the benchmark KSE-100 Index on Wednesday.
This reaction should not be misconstrued as a vindication of the PDM 2.0 government but simply as relief that a government, any government, is being formed. The country has been plagued by economic despair, social fragmentation, deep political polarization, and a dubious mandate.
The challenges facing the new government are daunting. It must address economic despair, social fragmentation, deep political polarization, and please allies while governing. It must also demonstrate some stability to international lenders.
The PPP has emerged as the most astute of the lot, likely to secure several constitutional posts despite refusing to carry the PML-N’s baggage. The other parties will also be accommodated through various ministries, potentially leading to an obscenely bloated cabinet.
The new government’s economic direction will likely be provided by the IMF and partially by the SIFC. The first task will be to complete the upcoming review of the SBA, which will evaluate performance till December (and possibly January and February).
The review may raise concerns about circular debt, gas and electricity prices, currency management, fiscal numbers, financing, and deficit. The next programme will be tougher, with the IMF potentially questioning the role of the SIFC and the involvement of the security apparatus in economic decision-making.
The IMF may also push for structural reforms, such as broadening the tax base, extracting tax revenue from provinces, and ending import restrictions. These reforms will be challenging for a weak coalition government.
The new government may have a window to cut interest rates after the completion of the second review of the SBA and the signing of the new programme. It will be interesting to see how the Fund responds to this and possible relaxations in the budget of FY24-25.
