Post-Punjab by-election developments have injected more volatility into an already fraught and vexed political situation in Pakistan. This has raised growing concerns about the fate of a precarious economy in the face of more political turmoil that seems to lie ahead. PTI’s stunning electoral victory was obviously consequential for the survival of the PML-N-led Punjab government. But political fortunes reversed in just a few days. In the dramatic events and wheeling and dealing that followed, the run-off election for the provincial chief minister took place on a day of surprises. Although PTI and its ally PML-Q enjoyed a majority in the House an unexpected turn of events saw PMLQ president Chaudhry Shujaat declare he would not support his cousin, Pervaiz Elahi as Imran Khan’s candidate.

He instructed party legislators to vote instead for Hamza Shehbaz and conveyed this decision to the deputy Speaker, who then rejected their votes cast for Elahi. This ensured a narrow win for Hamza. But instead of ending the Punjab crisis, this outcome is likely to aggravate it. With Khan calling foul, the deputy Speaker’s ruling has been challenged in the Supreme Court while PTI has called for public protests against its ‘stolen mandate’. The Supreme Court may well rule against the deputy Speaker’s action. Meanwhile, the coalition government at the centre has made it apparent it will continue in office until parliament completes its term in August 2023. But the question is how tenable this is, especially with the situation in Punjab mired in confusion. More importantly, can the fragile economy withstand what promises to be a period of more political turbulence and confrontation between the coalition government and PTI?

Imran Khan will continue to mount pressure on the government to hold immediate general elections. Towards this end, he is continuing to castigate the establishment on the unsubstantiated ground of siding with his political opponents. He also accuses the Election Commission of Pakistan of bias and has repeatedly demanded the chief election commissioner (CEC) — who holds a constitutional post — should resign. This despite his party’s decisive win in the by-elections in which it polled 47 per cent of the popular vote against 40pc for PML-N. Khan cast his party’s electoral success as the ‘defeat’ of both the establishment and ECP that he accused, without evidence, of trying to foil his victory. Even if Khan is able to get his way in forcing early elections, uncertainty will not end. He clearly wants a CEC of his choice.

This is unlikely to happen. So how will he deal with this eventuality if and when elections are called? This raises a related question. Will he agree with his principal political rival on who should head a neutral caretaker government, constitutionally mandated under Article 224 to oversee elections? Uncertainties don’t end here. In the absence of consensus between the government and opposition on an interim arrangement, the matter goes for decision to a parliamentary committee. If that fails to reach agreement, the ECP has to make that call, under the constitutionally prescribed procedure (Article 224-A) For now, it is the economy that is being adversely affected by political turbulence. The economy is far from being out of the critical ward. True that a staff-level agreement has been reached with the IMF, expected to go for approval to its executive board in August.

This did calm market sentiment, but only temporarily. Both volatility in global commodity and financial markets and political unpredictability at home is eroding confidence. The rapidly declining value of the rupee against the dollar is the most worrying sign of that. The rupee has depreciated by 20 per cent in the past few months, adding to spiralling inflation. The State Bank has pointed out that some of this depreciation is part of a global phenomenon due to the growing strength of the dollar. But other factors have also contributed over the months. Finance Minister Miftah Ismail attributed last week’s rupee plunge to a historic low to market panic due to “political turmoil”. While he hopes this will soon recede, continuing political confrontation suggests otherwise. In fact, the market will remain nervous until Pakistan gets significant cash injections from the IMF and others. Reports indicate that the Fund will release the first tranche of $1.1 billion once Saudi Arabia provides SDR (special drawing rights) of around $2.6 bn because Pakistan’s financing needs far exceed what IMF can disburse.

The finance minister acknowledged in his press conference last week that a “friendly country” would transfer SDRs through the IMF. Meanwhile, the recent downgrade of Pakistan’s credit rating outlook by Fitch Ratings has added to market jitters. The country’s foreign exchange reserves are around $9.7bn, which cover less than six weeks of imports. As the reserve cushion has begun to erode so has confidence. Moreover, heavy external obligations lie ahead — over $30bn estimated for this fiscal year, $21bn to repay debt and $10- 12bn to fund the current account deficit. This heightens the risk of a perfect storm. If reserves continue to dwindle, external capital injections prove inadequate or envisaged inflows don’t materialise, panic can take hold in markets even ahead of a cash flow crisis. Confidence can quickly evaporate over the perceived inability of the country to meet its financing requirements.

In a scenario where panic sets in and speculative pressures mount, people start converting rupees into dollars as a hedge against risk. This pressure can prompt the central bank to quickly run down reserves. And if the State Bank does not use its reserves, the rupee’s value plunges even more. This in turn can fuel another round of already high inflation, produce a sharp rise in import costs for fuel and of course aggravate the problem of a runaway fiscal deficit. The tenuous state of the economy urges an end to political turmoil and calls for responsible economic management in the months ahead. The fate of the economy is more consequential for the country than who wins the ongoing political battle. Prevailing in the power game will, in any case, be in vain if the battle for Pakistan’s economic stability is lost.