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Gilani Drops Fuel Hikes To Woo Coalition Partners Back -- But At What Price?

  • Abubakar Siddique

Pakistani Prime Minister Yousaf Raza Gilani (right of center) speaks with leaders of MQM during a meeting at their headquarters in Karachi on January 7.

Pakistani Prime Minister Yousaf Raza Gilani (right of center) speaks with leaders of MQM during a meeting at their headquarters in Karachi on January 7.

Less than a week after the country descended into political chaos when the Muttahida Qaumi Movement (MQM) defected to the opposition, leaving the Pakistan People's Party (PPP) scrambling to find new alliances, the MQM has returned to preserve the ruling coalition's majority.

MQM official Raza Haroon made the announcement on January 7 after days of hectic discussions that culminated in Prime Minister Yousaf Raza Gilani's visit to MQM headquarters in the southern seaport of Karachi.

"For the sake of our country, nation, and democracy, and in response to the prime minister's good will and for the promotion of democracy and keeping in view the delicate [political] situation of the country, Muttahida is announcing to sit on the government benches [in the parliament]," Haroon said. "But our coordination committee has decided that we will not be able to rejoin the federal cabinet for now."

But to woo his largest coalition partner back into the fold, Prime Minister Gilani was forced to accede to a key MQM demand -- the lifting of recently imposed and highly unpopular fuel-price hikes. And with the end of the short-lived austerity measures rises the question of whether Gilani set Pakistan on the road to economic ruin in order to preserve his government.

Series Of Setbacks

Independent economist Sakib Sherani, who in late December resigned from his post as senior adviser to the Finance Ministry, says the move is "not a good sign," as it steers the government away from economic reforms.

To rescue a sinking economy, Pakistan in recent years secured billions of dollars in aid from international financial institutions and Western donors, and Washington and the International Monetary Fund (IMF) were quick to criticize when Gilani rescinded the fuel-price hikes imposed at the start of the year.

Speaking to journalists in Washington after Gilani's announcement on January 6, U.S. Secretary of State Hillary Clinton urged Islamabad to improve its fiscal management.

Prime Minister Yousaf Raza Gilani
"We believe that the government of Pakistan must reform its economic laws and regulations, including those that effect fuel and its cost," Clinton said. "We have made it clear, as I did in a meeting with their ambassador, that we think it is a mistake to reverse the progress that was being made to provide a stronger economic base for Pakistan and we will continue to express that opinion."

Gilani's government has suffered other recent setbacks in its effort to right the country's economy.

In December, it failed to muster the political support needed to implement the Reformed General Sales Tax, a Pakistani version of value-added tax intended to broaden its tax net. The MQM and other coalition partners strongly opposed the proposed reform, leading Gilani to defer a decision until consensus could be found.

The December defection of another PPP coalition partner, the Jamiat Ulema-e Islam Fazl (JUIF); the short-lived departure of the MQM; and the January 4 assassination of secular Punjab Province Governor Salman Taseer added to the political uncertainty.

This, says Islamabad-based economist Sherani, may have led Gilani's government to engage in political horse trading that makes no economic sense and which bodes ill for the future.

"It is political expediency, and I think we are in a bit of a slippery slope in terms of the politics," Sherani says. "Now with the assassination of the Punjab governor, I think, the political temperature, especially in that province, is rising by the day. So the backsliding or reneging or going back on key reform initiative is not something that's going to be a one-off, unfortunately. I think this will establish a trend."

Economic And Political Reality

Pakistan will hold parliamentary elections in 2013 after the current parliament completes its five-year term. Few parliaments have finished their terms since 1985, and the current bitterly partisan atmosphere offers an indication that political parties are preparing themselves for the possibility of an early election, given that the governing coalition can fragment very quickly.

This is not to say that turning back the fuel hikes has not been greeted warmly on both sides of the National Assembly.

Pakistani officials say the decision could cost the government $58 million a month, and combined with the delays in the tax reforms, Islamabad could miss budget targets that could endanger its ability to make payments on $11 billion in IMF loans on time.

But Sartaj Aziz, leader of the opposition Pakistan Muslim League-Nawaz, welcomes the government's decision, and says that the assertion that the Gilani government is selling out Pakistan's economic future is not only inaccurate, it fails to take political reality into account.

Aziz, a former forging and finance minister, says that the current government is weak because of its slim numbers in the parliament, and this severely hampers its ability to implement reforms advocated by foreign donors.

He says his party will back an alternative strategy to improve the economy.

"The best way to reduce the budget deficit and control inflation is to reduce expenditure, particularly non-development expenditure. Eliminate corruption. Eliminate the losses of [the state-owned] corporations, which is 300 billion [rupees or nearly $4 billion]. Then reduce any circular that is relating to energy," Aziz says. "Now all these factors will bring out enough savings to achieve the economic objectives and you won't have to resort to new taxes."

Such views are sure to have few buyers internationally.

"It will not be welcome just by the IMF and the U.S.," economist Sherani notes, "other stakeholders and development partners are not going to take it well."

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