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Shehbaz Sharif faced with Khan-era fuel-power subsidy, inflation and polarised Pakistan

The new government in Pakistan, headed by Prime Minister Shehbaz Sharif, faces major challenges — economically, politically and socially.

Handling the economy is possibly the biggest challenge, compounded by the fact that the new government has a very short term — a maximum till August 2023 till the next general elections, or a shorter term if elections are held earlier. This would be inadequate to take the tough remedial measures that are required before going to the people to seek a fresh mandate.

Take the case of oil subsidy. In February, the outgoing Imran Khan government had announced a subsidy of Rs 21 per litre on petrol and Rs 51.54 on diesel, costing the exchequer Rs 260 billion till June 2022. There was also a Rs 5 reduction on per unit of electricity. These subsidies led to the $6 billion IMF Extended Fund Facility (EFF) programme stalling. The challenge for Shehbaz Sharif would be to navigate between ending the fuel subsidy —which would be very unpopular and provoke a strong public backlash — and continuing with them, which would be financially disastrous.

The current account deficit (CAD) during the first nine months (July-March) of the on-going fiscal year has ballooned to over $13 billion. Analysts expect it to reach $16-18 billion in the current fiscal year ending June 2022. Such a large CAD would lead to precipitous devaluation, making imports more expensive and leading to run-away inflation that had already hit 13% in April.

To avoid depletion of foreign exchange reserves, Pakistan would require dollar inflows of $9-12 billion in the current fiscal year. This will have to be in the form of rollover and fresh loans from China, Saudi Arabia, commercial loans from consortium of banks and revival of the IMF EFF.

The government has initiated talks with the IMF on this score. It has also sought a nine-month extension of the EFF — from September 2022 to June 2023 — and an increase by $2 billion to $8 billion. Indications are that the programme could be revived, provided the fuel subsidies are reversed.

The yardstick by which the people would judge the new government would be how it manages inflation, whether there are increases in fuel prices, and how it tackles severe load-shedding at the height of a very hot summer caused by Pakistan’s inability to buy enough fuel to run its power plants.

With elections due in a year, the political cost of unpopular measures would be enormous for the government.

Among the key political challenges would be managing the fallout of Khan’s large rallies, his threat of confrontational politics and a long march at the end of May aimed at forcing early elections.

Khan, who is not reconciled to his democratic removal, is bound to capitalise on popular unrest in case of increases in fuel prices. He has convinced himself that popular support would translate into votes based on his narrative, false as the army has clarified, of an American conspiracy that unseated him.

What is unsettling Khan is that the government is preparing to launch its own brand of accountability against him, just as he had launched a vicious accountability drive when they were in the opposition.

The government would be hoping that Khan will eventually run out of steam since sustaining the momentum of rallies is difficult and, in any case on their own, cannot force an election. Khan would rather that confrontation leads to violence, forcing the army to step in, than allowing Sharif to continue in power.

As if all this were not enough, the government would have to face the challenge of dealing with a deeply polarised and divided Pakistan, even more than it has usually been. This would be the lasting legacy of the confrontational politics and vicious rhetoric Khan indulged in for the last four years, labelling those opposed to him as traitors. An example was a report in Dawn about a seven-year-old girl telling her father that in her class the followers of Pakistan Tehreek-iInsaf (PTI) and Pakistan Muslim League-Nawaz (PML-N) have started sitting separately.

The writer is a member of the National Security Advisory Board. The views expressed are his own.

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