Is Pakistan’s political transition in danger of succumbing to its economic woes? That’s a question increasingly making the rounds among the country’s businessmen as pro-democracy activists look towards the first-ever transfer of power from one civilian administration to another without at least some military involvement.

Almost two weeks have passed since prime minister Mir Hazar Khan Khoso took charge to oversee parliamentary elections due on May 11. While he has named a 14-member cabinet, Khoso still does not have a finance minister.

On Tuesday (April 2), Mushtaq Khan, a respected economist presently at the central bank, was summoned to the oath-taking ceremony at president Asif Ali Zardari’s official mansion in Islamabad. He was expected to be named finance minister.

However, his name among the incoming ministers was removed at the last minute on a technicality. A senior government official abruptly told Khan he was not eligible for the post as long as he continued to serve at the central bank. Given that the transition is due to take place in less than five weeks, Khan reportedly refused to quit the central bank and has resumed his duties at the institution.

But there is a more sinister dimension to the saga. Beyondbrics has been told by a senior finance ministry official, that the rulers in Islamabad feared Khan would instantly get down to brutally cutting expenditures promised for the next few months.

Pakistan’s fiscal deficit for the July 2012-June 2013 financial year is in danger of soaring far ahead of the target of 5 per cent of GDP and edging over nine per cent – a level that would alarm almost any central bank official.

The economy is growing but modestly given Pakistan’s crying need for faster development – GDP grew 3.7 per cent in the 2011-12 financial year and the government target for the current year is 4.3 per cent. Meanwhile, the inflation target is 9.5 per cent, down from last year’s 11 per cent.

The current account deficit is not huge – at $4.6bn or 2 per cent of GDP for 2011-12. But some economists warn that the central bank’s modest foreign reserves of approximately $7bn – sufficient to cover just two months of imports – are beginning to look uncomfortably low. If Pakistan fails to rein in its profligate public spending, a much-needed IMF loan programme will likely not happen.

The soaring fiscal deficit, which according to one western economist is the “mother of all evils that surround Pakistan”, is reportedly driven by allocations to populist schemes.

In an election year, tough cuts to politically-driven expenditure would hit support from ordinary voters to key political groupings, notably the Pakistan People’s Party (PPP) of president Asif Ali Zardari.

“Pakistani politicians would much rather risk wrecking the country’s meagre finances than risk unpopularity through prudent financial policies” adds the western economist. It is difficult to tell exactly how and when the last seat on the cabinet’s high table will be filled. But the fiasco surrounding Khan says much about the top echelons of Pakistan’s political structure and their refusal to reform the economy, notwithstanding the political transition.

Related readingPakistan sets May 11 election date, FT
Pakistan: rate cuts yet to bear fruit
, beyondbrics
Democracy wins if Pakistan shuns Musharraf
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