Turbulent waters: Challenges and prospects for a coalition government in Pakistan

In Pakistan’s tumultuous politics, divergent ideologies and competing interests may clash, yet find themselves forced together. The emergence of a coalition government comprising the Pakistan Muslim League–Nawaz (PML-N), the Pakistan Peoples Party (PPP) and other smaller parties presents a daunting challenge in governance. Tasked with addressing a myriad of economic hurdles ranging from macroeconomic instability to climate resilience, the fragile coalition will stand at the precipice of reform, with an impatient public demanding results. 

The PML-N and PPP at the heart of the coalition, each with their divergent policy agendas outlined in their respective manifestos, present a formidable obstacle in charting a coherent economic course. Compounding this challenge is the issue of legitimacy. Skepticism will loom large over the mandate of the new government as it finds itself grappling to establish its credibility in the eyes of both domestic stakeholders and international partners. This crisis of legitimacy threatens to undermine the coalition’s ability to implement the painful and unpopular reforms that lie ahead.

For the incoming government to succeed, it must negotiate with the International Monetary Fund (IMF) for a new extended fund facility (EFF) that will aim to steer Pakistan toward macroeconomic stability. The IMF is likely to demand a comprehensive overhaul of the country’s economic framework. From increasing tax revenue to restructuring state-owned enterprises, the laundry list of likely IMF conditions will present a formidable challenge for a government already stretched thin by internal contradictions. For instance, would PPP agree on the recalibration of the National Finance Commission award that the federal government may need to survive fiscally?

The prospect for disparate political interests coalescing to do so appears dim.

- Javed Hassan

Given the borderline debt sustainability of Pakistan, the new government may also have to consider undertaking domestic and external debt restructuring as part of its efforts to address fiscal challenges. This could involve renegotiating debt terms with creditors to alleviate financial pressures and create fiscal space for priority spending on essential services and infrastructure. However, debt restructuring endeavors will need to be meticulously choreographed to avert adverse repercussions on investor confidence and sovereign credit ratings.

Expanding on specific measures to increase tax revenue in the Pakistani context, the government will need to explore several strategies. First, broadening the tax base by bringing more sectors that have previously contributed little to tax revenues, such as retail and agriculture, into the tax net through targeted outreach. Increasing retail taxes is likely to be opposed by PMLN and agriculture by PPP. Second, enhancing tax compliance and enforcement mechanisms to reduce tax evasion and avoidance. Third, rationalizing tax exemptions and incentives to ensure that they are equitable and do not unduly burden the state coffers. Finally, overhauling the tax administration to streamline processes and improve efficiency.

A disconcerting narrative emerges, characterized by a widening chasm in economic competitiveness and social resilience when Pakistan’s economic and social trajectory is examined against its comparators and neighbors. A fundamental underpinning of this narrative lies in the systemic distortions plaguing Pakistan’s private sector, exacerbated by policies veering toward import substitution, tariff barriers, and exchange rate misalignments.

Furthermore, Pakistan is severely lagging behind its comparators in both human capital and climate resilience, and therefore, the government needs to prioritize investments in education, health care, and environmental sustainability. This includes expanding access to quality education and health care services, particularly in underserved areas, and investing in skills development and vocational training to equip the workforce for the jobs of the future. Additionally, the government should implement policies to mitigate the impact of climate change, such as improving water resource management and adopting sustainable agricultural practices.

Among these formidable challenges, the threat of corruption looms large, casting a shadow over the coalition’s commitment to enact meaningful governance reforms. The IMF must insist on anti-corruption legislation as part of a broader governance overhaul to address systemic flaws and foster transparency at all levels of government.

Drawing from international experiences, the successes and failures of coalition governments provide valuable insights into the potential trajectory of Pakistan’s incoming regime.

In India, the coalition government led by Prime Minister Narasimha Rao and Finance Minister Manmohan Singh in the early 1990s carried out meaningful economic reform to meet urgent exigencies. Faced with a severe balance of payments crisis and stagnant growth, the Rao-Singh government implemented a series of liberalization measures, including trade and investment reforms, fiscal consolidation, and deregulation of key sectors. Conversely, the experience of Italy serves as a cautionary tale of the perils inherent in coalition politics. Characterized by incessant infighting and political instability, Italy’s coalition governments have often struggled to enact meaningful reforms or address pressing economic issues.

Bold and decisive action is required for Pakistan to forge a path forward that balances the imperatives of economic stability with the aspirations of social justice while navigating the burden of international obligations. The prospect for disparate political interests coalescing to do so appears dim.

– Javed Hassan has worked in senior executive positions both in the profit and non-profit sector in Pakistan and internationally. He’s an investment banker by training. Twitter: @javedhassan