Jan. 20 (Bloomberg) -- Pakistan’s government and the main opposition met today in a bid to hammer out a consensus on ways to contain the nation’s expanding budget deficit and revive an economy battered by terrorism and floods.
Prime Minister Yousuf Raza Gilani’s economic team, led by Finance Minister Abdul Hafeez Shaikh, will begin “substantive and meaningful” negotiations with its chief rival, the Pakistan Muslim League of former prime minister Nawaz Sharif, Ahsan Iqbal, a spokesman for Sharif, said in a phone interview in Islamabad today.
After today’s meeting, the government formed panels that include members of Sharif’s party to probe into the nation’s power crisis, petroleum pricing and bank loan write-offs, Shaikh told reporters in Islamabad today. The panels will submit proposals by Jan. 26. The government is also seeking Gilani’s approval to restructure boards of Pakistan Steels Mills Corp. and eight power distribution companies, he said.
The International Monetary Fund, which bailed out Pakistan with an $11.3 billion loan in November 2008, has urged the government to cut subsidies and end tax exemptions. Political wrangling within the ruling coalition forced Gilani to reverse an increase in fuel prices this month -- a rollback also demanded by Sharif -- and defer plans to tax more services.
Any political agreement on a reform program will force the government to cut spending by 30 percent, restructure state-owned money-losing companies, including Pakistan International Airlines Corp. and Pakistan Steels, and set a new price mechanism for power and gas consumers, Iqbal said.
“Politics is driving economic decision making here,” Abid Qayum Sulehri, executive director at the Islamabad-based Sustainable Policy Institute, said in a phone interview. “This will provide Gilani much-needed political cover to take tough economic decisions.”
The government’s economic team met with Sharif’s party, Pakistan Muslim League-Quaid, and coalition partners Muttahida Qaumi Movement and Awami National Party on Jan. 18 to brief them about the state of the economy. Gilani reached out to the opposition after Sharif demanded the premier implement a 10-point economic agenda within six weeks and move against corrupt officials or face a campaign for his ouster.
The Karachi Stock Exchange’s 100 Index, which advanced 28 percent last year, fell 1.3 percent to 12,411.87 today in Karachi. The rupee traded at 85.73 against the dollar, after falling 1.65 percent last year.
“I’m not too optimistic that this political give-and-take will change things substantially on the ground,” said Asif Ali Qureshi, head of research at Invisor Securities Ltd. in Karachi. “Investors usually get nervous when foreign exchange reserves start shrinking and the currency comes under pressure. That hasn’t happened so far this year.”
Gilani on Jan. 7 succeeded in winning back the support of his partner, the MQM, after reversing the fuel-price rise. His Pakistan Peoples Party lost its majority Jan. 2 when the MQM had quit the coalition. President Asif Ali Zardari’s grip on power was further undermined by the Jan. 4 assassination of a key aide, the governor of the Punjab province.
The petrol-price rollback, which runs the risk of a wider budget deficit, was criticized by U.S. Secretary of State Hillary Clinton, who urged Pakistan not to “reverse progress.”
“We have moved forward in a concrete way,” Ishaq Dar, a former finance minister and a key aide to Sharif, told reporters after the meeting. “You’ll see things moving in the next few weeks.”
Maria Kuusisto, an analyst at consultant Eurasia Group, said in a Jan. 14 telephone interview from London, that Pakistan’s budget shortfall may touch 8 percent of gross domestic product, or 1.3 trillion rupees ($15.15 billion) in the year through June from 6.3 percent in the previous year.
The central bank governor last month blamed government borrowing for price pressures and said raising interest rates may impede investments and undermine economic growth.
The government borrowed 401 billion rupees from the central bank between July 1 and Jan. 8, more than double the amount it borrowed in the same period last year, according to data from the State Bank of Pakistan.
“Pakistan is operating without any fiscal order,” Sakib Sherani, an economic adviser in Pakistan’s finance ministry from July 2009 to December 2010, said in an interview. “The fiscal mismanagement may produce the biggest budget deficit in Pakistan’s history in absolute terms.”
The State Bank of Pakistan on Nov. 29 raised its benchmark discount rate for the third time since late July, by a half point to 14 percent. Consumer prices rose 15.46 percent in December from a year earlier, the most among the 17 Asian economies tracked by Bloomberg. The next monetary policy decision is scheduled for Jan. 29.
Pakistan’s $167 billion economy has also been set back by floods last year, its worst in the nation’s 63-year history. The Asian Development Bank and World Bank estimate caused damage of about $10 billion.
Hundreds of civilians and security officials have died in retaliatory bomb and gunfire attacks since Pakistan’s army began an October 2009 offensive against Taliban guerrillas in the tribal region of South Waziristan, near the border with Afghanistan. President Barack Obama has called Afghanistan and Pakistan the “epicenter of violent extremism practiced by al-Qaeda.”
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