Pakistan

Strong Mandate Will Not Guarantee Stability
The Pakistani electorate delivered a convincing victory for the PML-N at a general election held in May 2013, and further gains in subsequent by-elections and the addition of independent lawmakers have provided Prime Minister Nawaz Sharif’s government with a comfortable majority in the lower house of Parliament.  A three-year lending deal approved by the IMF in early September will help to stave off an immediate financing crisis, and the hope is that Sharif’s legislative muscle will enable his government to fulfill the terms of the agreement, which include an overhaul of a tax administration made overly complex by provincial government jurisdiction, as well as other structural reforms that, if implemented, would contribute to improved business efficiency.  The interest of investors has been piqued by promises of a fresh privatization push as the government takes steps to reduce the large budget deficit, but successfully selling off loss-making state firms will prove no mean feat in the light of the weak finances of many of the companies slated for sale, the opposition of entrenched trade unions, and the uncertain cooperation of a corrupt and inefficient court system.  The new government has also taken on the task of addressing crippling energy shortages that have stunted economic productivity and exacerbated social discontent.  Alleviating the problem will require investment in generating capacity and other infrastructure that is to be financed with funds made available through deep cuts in spending on subsidies.  To its credit, the government has bitten the bullet on subsidies.  However, with businesses passing on the cost of higher electricity prices to consumers, inflation is forecast to spike in the final quarter of the year, creating a heightened risk of social unrest, an especially unwelcome prospect in a country such as Pakistan, where political violence poses a constant threat to domestic stability.
Numerous Barriers to Achieving Economic Potential
The government will need to realize savings equivalent to 0.5% of GDP—or roughly $1.7 billion—to hold the deficit to the 5.8% of GDP target for the 2013/2014 fiscal year.  The 30% hike in electricity tariffs that went into effect on October 1 is projected to reduce government spending by close to that amount all by itself, but achieving the target will be difficult if disappointing growth contributes to a shortfall in revenues.  Any semblance of economic health hinges on continued access to international financial support, but barring an unlikely reduction of corruption, it is open to question whether the government is capable of making effective use of whatever support it does receive.  Growth in services, particularly in the trade and transport sub-sectors, will help to offset the weakness of the manufacturing sector and weather-related volatility in agricultural output, but pressure to tighten fiscal and monetary policies will slow the pace of expansion to an average of 3.9% per year through 2018.  The persistence of fairly large budget and current account deficits will contribute to chronic currency weakness, complicating efforts to contain inflation.
Forecast Summary

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