Nawaz Sharif will become prime minister for a third time after his party staged a convincing win at the 11 May general election.
IHS Global Insight perspective | |
Significance | Sharif's emphatic victory creates a strong mandate for pro-business governance and privatisation. |
Implications | This emphasis is likely to see the new government revisiting its predecessor's efforts to normalise trade with India. |
Outlook | In order to improve the business environment, Sharif must address Pakistan's persistent energy shortfall and the threat posed by terrorism. |
Emphatic, convincing
The opposition Pakistan Muslim League of Nawaz Sharif (the PML-N) scored a convincing victory in Pakistan's general election on 11 May. Sharif campaigned on a pro-business platform that distinguished his party from the social-democratic policies of the incumbent Pakistan Peoples Party (PPP, see Pakistan: 15 March 2013: Pakistan's ruling party releases election manifesto). The PPP suffered a poor showing at the polls, winning only around 30 seats, and it is now vying for third place overall with the party of World Cup-winning cricketer Imran Khan, the Pakistan Tehreek-e-Insaf (PTI). The polls were marred by violence and allegations of rigging, but not to the extent where Sharif's victory can be disputed plausibly.
The latest provisional count by the private Geo News channel suggests that the PML-N won at least 124 seats of the 272 available in the National Assembly, with all but eight counted. This leaves it only a dozen seats short of an outright majority. Although the PML-N must now turn to smaller parties to make up the difference, the gap is so small that Sharif's party is not obliged to concede much in terms of policy to its partners. This leaves little party-political impediment to Sharif's pro-business agenda, especially given the weak, fragmented opposition in parliament. Today (13 May) Karachi's benchmark KSE100 stock market hit an all-time high of 20,232, up 1.6% in early trade, as fears of a weak coalition were dispelled.
Austerity and privatisation
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Nawaz Sharif waves to his supporters at a party office |
The PML-N's manifesto made ambitious promises for economic revival. It targets an average of 6% GDP growth over the next five years, a pledge that becomes bolder when one considers the economy has managed barely half that since 2008. The PML-N plans to do this by attracting foreign direct investment (FDI) into the agriculture sector to boost exports, converting at least 50% of remittances into investments via new financial products, building new infrastructure, and advancing domestic extractive industries. Fiscal consolidation was a theme of the party manifesto. IHS Global Insight expects Pakistan's fiscal deficit to exceed 6.0% of GDP in fiscal year (FY) 2012/13, crowding out the private sector from the banking system. The PML-N intends to bring this down to 4% by increasing the perennially low tax-to-GDP ratio from 9% currently to 15% by the end of the government's term.
The party also pledged to slash non-wage government expenditures by one-third and to privatise loss-making state-owned enterprises (SOEs). The latter, which include Pakistan International Airlines and Pakistan Steel Mills, inflict losses on the government of USD4 billion a year, according to PML-N figures. The Privatisation Commission, established by Sharif in 1991 during his first stint as prime minister, is likely to be revived. Sharif's first term in office in 1990–93 witnessed a boom in state divestment, a policy he revisited during his post-1997 government and which was continued by the military after it ejected Sharif in a 1999 coup. The former PPP government has been far less enthusiastic about privatisation, reflecting its centre-left ideology and its close relations with some of the loss-making SOEs.
Lacking energy
Improving the business environment presents Sharif with a difficult challenge. One obvious route is to continue the previous government's progress towards normalising trade with India. This involves stripping down the list of non-tradeable and sensitive items to their regional baselines set by the South Asia Free Trade Agreement. The PPP-led government came tantalisingly close to realising this breakthrough, which would have been the most tangible output of a decade of detente between the traditional enemies. Hopes are now high in India that Sharif can deliver on this front, as part of his pro-business agenda. The strength of the PML-N's majority should render it less susceptible to the kind of special-interest lobbying that delayed the PPP's efforts to open trade. Most Indian media outlets praised Sharif's win as a victory for pragmatism. His Indian counterpart Prime Minister Manmohan Singh yesterday invited Sharif to India to discuss future co-operation.
However, Sharif's ability to forge a new relationship with India is heavily qualified by Pakistan's powerful generals, whose predecessors ousted Sharif in 1999. Although the new coalition is shaping to become the strongest civilian government in the country's recent history, the military will continue to define relations with Pakistan's neighbours: China, Iran, India, and Afghanistan, in decreasing order of friendliness. The military is particularly able to disrupt relations with the latter two powers if it identifies a strategic necessity for doing so, and Sharif's regional trade policy will be contingent on military calculations. Sharif must also rely on the military to tamp down on terrorism, which is a major disincentive to FDI. Managing relations between political parties, the generals and a stridently independent Supreme Court proved a major test of the previous government, and triangular frictions are also likely during the next five years.
One possible avenue for greater co-operation is in addressing India and Pakistan's energy deficits. High priority will be given to importing natural gas through pipelines, according to the PML-N manifesto. However, this does not necessarily mean the survival of the Iran-Pakistan pipeline currently under construction, given the potential for that project to fall foul of international sanctions. However, the government is likely to remain on board for the proposed link between India and Turkmenistan, via Afghanistan and Pakistan, although that project also faces severe terrorism and geopolitical risks. The PML-N has a detailed plan for addressing the so-called "circular debt" that leaves Pakistan's electricity generators unable to pay for fuel, and the governance failures among the distribution companies that add to this problem. The new government will continue its predecessor's efforts to mine coal from the southeastern Thar desert and to develop wind energy in the same part of the country. State subsidies for fuel will be "narrowly targeted" at the poorest sections of society.
Outlook and implications
Despite the parties' ideological differences, there will be a strong vein of continuity between Nawaz Sharif's government and that of its predecessor. Sharif stands to benefit from some of the investments made to improve power generation and transmission over the past five years. Unlike his predecessors he does not have to deal with the immediate fallout from the 2008 financial crisis, which tempered economic growth under the PPP. Much of the groundwork for trade liberalisation with India has already been laid. Sharif therefore finds himself in a strong position to deliver on many elements of his pro-business agenda, but he will also be heavily dependent on the military if he is to improve domestic security and regional collaboration.