The bumpy ride heralded at the economic juncture over the past two years appeared to be slowing down owing mainly due to the smooth transition of the government to caretaker setup, with signs surfacing that the election will be held in time leading towards political soundness.
A country like ours needs political stability, which is the key to economic revival. Nearly all the key thinkers of the financial markets united over that revival in confidence amidst political uncertainty. In the past, on several occasions, political happenings dictated the market sentiments, weakening the domestic currency and trimming the share values. But the current caretaker setup lodged stringent crackdown against hundi/hawala, hoarders, and smugglers, proved beneficial.
Moreover, building strong relationship with brotherly countries like Saudi Arabia, UAE, Qatar, and China, giving full assurances, and inviting them to invest in Pakistan bodes well. Caretaker Prime Minister Anwar Ul Haq Kakar earlier said that efforts are being made to bring $25 billion each foreign direct investment from Saudi Arabia and UAE in the agriculture, technology, oil, and gas sectors brought good vibes and with political stability knocking the door, these commitments would be around the corner.
Moreover, the recent visit of Caretaker Prime Minister to China, where he held bilateral talks with his counterparts, agreed upon to bring new investment of $65 billion under the CPEC project, venturing into road, energy, rail and other infrastructure projects to improve road links to boost trade through land route.
All these developments are not enough, but still a foundation has been laid for the economic revival. Some signs of recovery were witnessed if we take a quick look on the recent numbers. Though it is too early to say that all things on the western fronts are positive and we can blow the trumpet but still few indicators can be tabled, like the Pakistan Stock Exchange which since start of the month recorded hefty gains.
Moreover, the crackdown and some regulatory measures are taken by the State Bank to tighten screw with regard to Exchange Companies, allowing banks to open exchange companies. All the top most banks have applied to open exchange companies with seed capital of Rs 1 billion.
The rupee hit to Rs 307.10 to a dollar at banks while at open market Rs 333. The crackdown, stringent checking and exchange companies curtailing issuance of dollars on CNIC from 900 dollars to 500 dollars forced the dollar to move down.
In open market rupee recovered by Rs 53 and in open market around Rs 28. Moreover, it forced holders to sell dollars at exchange companies, according to conservative estimates exchange companies sold $900 million to banks.
Abdul Azeem head of research at Spectrum Securities said that how political stability underpins economic stability by inspiring investor confidence, enabling consistent policies, encouraging infrastructure development, upholding the rule of law, fostering social harmony, facilitating international trade, and ensuring monetary equilibrium. “Without it, economic growth falters as uncertainty and risk deter investment”, he said
Abdul said that Election outcomes hold sway over economic prospects through policy direction, stability, international relations, government spending, monetary policy, market sentiment, regulatory environment, and income distribution. The impact depends on the policies of elected leaders and the broader economic landscape. Political stability and peaceful transitions are pivotal for positive economic results, he said.
Hammad Qureshi, an economic expert said that there is a causal relationship between political stability and economic growth. Economic unrest is the cause of political instability and this malediction puts economy on the downward spiral. The recipe for economic development or growth is to increase investment whether it be on human, infrastructure or private investment but the prerequisite for every feasible investment is stability, he said.
“Uncertainty is a risk and investor would never want to park his money where the systematic or political risk is higher because it will put his return in jeopardy”, Hammad said.
The history of Pakistan is marred by the episodes of political unrest and we have witnessed the impact of this curse in the shape of economic slowdown, poverty, unemployment, lack of infrastructure and absence of basic necessities (Health & Education) for the masses.
However, let’s look at the future and we find that elections are around the corner. If a government is formed after free and fair elections it would definitely send signals to investors (domestic and foreigner) that the prospective government would be sustainable because it is formed by the people, he said.
A democratic setup would automatically give guarantee of a stable environment to investors, Hammad explained. The new government with political will likely to curb inflation which would likely to continue its downward trajectory in the upcoming months. This projection is expected to result in an annual average of 24% for headline inflation during the FY24.
These expectations are based on several factors, including reduced demand-side pressures, the stabilization of global commodity prices, and the influence of a high base effect. This stands in contrast to the FY23, where the average headline inflation rate was higher at 29.2%.
Moreover, the recent data published by PBS indicates an uptick in the output LSMI for Aug’23, showing a 2.5% increase on a YoY basis. After a 14-month period, LSM finally saw positive YoY growth in Aug’23. In addition, LSM’s MoM growth reached its highest point in 9- months (Dec’22), up 8.4%. With this, during 2MFY24, LSM achieved a positive growth of 0.5% YoY.
The smooth transition of the government and if Nawaz Sharif led government will be in the driving industry to limp back to normalcy. The recent move of the government relaxation of import restrictions has been a pivotal factor in driving growth of the LSMI.
Therefore, the government should not choose to raise interest rates further and instead opting for a monetary policy that promotes easing is likely to strengthen the growth prospects of the LSM and overall economy.
Ali Nawaz, CEO, Chase Securities said Political stability in Pakistan is crucial for economic stability as it fosters an environment conducive to investment, development, and sustainable economic policies. A stable political climate reduces uncertainty, encouraging both domestic and foreign investors to engage in long-term ventures, ultimately contributing to economic growth.
The symbiotic relationship between economic and political stability is particularly vital for a country’s progress. When politics is stable, governments can implement consistent economic policies, attracting investments and promoting financial confidence. In turn, a robust economy can generate resources that support political stability, creating a positive feedback loop.
“While elections hold the potential to shape economic policies, their impact on immediate economic improvement depends on various factors”, Ali said.
Sound economic strategies, effective governance, and a focus on key issues are essential for translating election results into tangible economic benefits. It’s a nuanced process, and the connection between political changes and economic outcomes requires careful consideration and implementation, he said.
