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He has his work cut out

india Updated: Jun 05, 2013 23:19 IST

Pakistan's economic problems are remarkably similar to those of India's, only writ on a much larger scale. The new prime minister, Nawaz Sharif, has returned for a third term with a considerable majority in the National Assembly and will need all the political capital he can amass to tackle Pakistan's economic problems — many of which are really about entrenched interest groups rather than the actual vibrancy of the economy.

Pakistan's economy is growing at half the rate of India's and is heading for a current account crisis as its foreign exchange reserves are now at dangerously low levels. Sharif's first major economic decision is expected to be about deciding whether to buffer his country's reserves by going to the International Monetary Fund (IMF) or the Saudi Arabian government — or turning to both. Islamabad has already earned a little breathing space through its recent trade credit swap agreement with Beijing.

Going to the IMF would be a far more credible action in terms of ensuring that Pakistan's economy shifts to a more credible and sustainable path.

The IMF, unlike the Saudis or the Chinese, would impose a reform straitjacket on the country — that is exactly what Pakistan needs. Pakistan's economic strength is its enormous informal sector, estimated to equal over a third of the GDP, about a half more than the estimate for India.

This and its untaxed and unregulated agricultural sector provide the employment and income that keep its population from immiseration. The economy's weakness is the formal sector, notably the government. Less than a million Pakistanis pay taxes and the government is caught in politically-driven subsidy traps.

This means its fiscal condition is chronically sick. The worst example of this is its power sector which is mired in billions of dollars of unpaid bills.

But it is Sharif's own constituency of rich farmers, businessmen and urban middle classes who are guilty of the worst economic sins like avoiding taxes.

It is not yet clear whether Sharif will have the political gumption to take on these groups. If he avoids the IMF, he will be signalling that he prefers to take the traditional Pakistani way out of looking for a generous foreign hand to pay its bills and avoid painful reforms. The latter would be probably Sharif's preference.

The only saving grace is that Pakistan's economic plight is so poor that no foreign hand — especially given the poor relations between Islamabad and Washington — would be able to provide enough assistance.