Pakistan election: Economic challenges facing Nawaz Sharif

Pakistani workers carry out their daily work at the Kohinoor textiles factory in Rawalpind Power cuts can put businesses and people out of work

Nawaz Sharif faces many economic challenges as he becomes prime minister of Pakistan for an unprecedented third term, but most pressing of them all will be sorting out the country's energy crisis, as the BBC's Shahzeb Jillani reports from Karachi.

At exactly 8 o'clock in the evening, an entire neighbourhood in Karachi's Malir district plunges into darkness. It's a cue for restless children in cramped houses to come out and play in the narrow back streets. Women and the elderly usually hang out on their balconies or roof tops to beat the sweltering summer heat and humidity.

Within minutes, those who can afford back up power, kick-start their noisy generators. Others with more modest means rely on battery-run electricity using a device called UPS - or Uninterruptible Power Supply - enough to keep a few lights and ceiling fans on.

Many others who cannot afford either have to make do with lighting candles and using handheld fans to cope with the hot and sticky weather.

"It's very frustrating. I can't sleep at night. I am often tired and grumpy at school because of load-shedding," says Hadia Sohail, a teenager trying to catch up on her homework by a candlelight. By load-shedding, she means the rolling power outages across the country that Pakistanis have come to detest so much.

The blackouts are a daily occurrence. And they have become longer and more frequent over the years. The country's biggest province of Punjab has been the worst hit - where at times outages last up to 20 hours a day, putting factories out of business and people out of work.

Nawaz Sharif

Former Pakistani PM Nawaz Sharif celebrates in Lahore. 11 May 2013
  • Born in 1949 to family of a prominent Lahore industrialist
  • Served as Punjab's chief minister from 1985 to 1990 under military dictator Zia ul-Haq
  • Previous terms as prime minister 1990-1993 and 1997-1999
  • Deposed by Gen Musharraf and given a jail term
  • Went into exile in Saudi Arabia before returning in 2007
  • Seen as conservative and pro-business

The crippling energy crisis was seen as the decisive issue in the general election on 11 May.

Most analysts agree that of all the perceived failures of President Zardari's government, it was this issue which cost his PPP party the election in Punjab.

In contrast, Mr Sharif swept the vote in Pakistan's most populated province, in part because of his campaign slogans promising to end the blackouts and boost economic growth.

But it would seem winning the election was the easy bit. Now begins the hard task of putting Pakistan's faltering economy back on track.

Daunting challenges

For starters, Mr Sharif is taking over the government at a time when the country's finances are in a mess. Over the past five years, Pakistan's balance of payments position has worsened.

Foreign exchange reserves have been dwindling, leaving the country with about only three months of import cover. With bigger IMF repayments due this year, the country faces a looming crisis.

Growth and investment have remained low. An absence of new job opportunities has meant more and more young educated people are out of work.

The economy suffers from a condition some experts call stagflation, a period of prolonged economic slowdown coupled with sharp price rises. It doesn't affect the rich and powerful as much, but hurts everyone else.

Karachi - men sitting about with little to do Workers are left with nothing to do during the power cuts

The challenges are daunting, and the time to tackle them will be short. Within days of taking office, the incoming government will present its first national budget for the financial year 2013-14.

Mr Sharif will have to get to grips with the country's large fiscal imbalance. His government will have to come up with ways to boost tax revenues and cut government spending.

Mr Sharif will need to put forward a tax reform agenda to curtail rampant tax evasion in Pakistan. Traditionally, in this country of 180 million, only about 0.9% of people pay taxes. Despite previous government announcements to widen the tax net, last year the country registered 9% of tax-to-GDP ratio, one of the lowest in the world.

As an industrialist himself, the new prime minister inspires confidence among traders and industrialists. He is seen as someone who understands the challenges facing the economy. But he is also close to big business, critics say. So while Mr Sharif may very well try to get the country's rich and powerful on board his reform agenda, he would probably not want to press them too hard for fear of losing their support.

Saudi bail-out?

To ease some of these pressures, Mr Sharif will urgently need to shore up inflows of foreign money. Most economists feel the incoming government will have no choice but to go back to the IMF.

But that's an option the new government does not appear keen on, at least for now. Sartaj Aziz, Pakistan's former finance minister and a close aide to Mr Sharif, has said the country is exploring other ways of reviving the economy.

Mr Sharif and his advisers are pinning their hopes on help from the Saudi royal family, seen as close allies of Mr Sharif. Reports indicate his team is in talks with the kingdom for a deal to import oil on deferred payments.

Noreen, 13, uses candlelight as she studies during a power cut in a slum in Islamaba Many are forced to use candles for light when the power goes out

The extent or terms of the proposed agreement are unclear. But if such an arrangement is reached, details are likely to emerge during Mr Sharif's first visit to the kingdom after taking office.

"If you solve the energy crisis, you will solve a lot of the problems Pakistan faces," says Raza Jafri, head of research at the investment firm AKD Securities.

"I think given the strong mandate the new government is coming in with, they have a very good chance of following through on their promises."

The way forward

Analysts believe that in the short term, the government aim will be to be seen to be doing something to ease the power crisis. It will be a way of buying time to really figure out a way to bridge the gap between Pakistan's energy supply and demand, estimated to be about 6,000 MW.

In the medium to long term, however, the government will need to come up with a broad based structural reform agenda.

That could inevitably involve taking unpopular, but long overdue, steps like cutting subsidies and increasing power rates.

Pakistan will also have to finds ways to develop more hydro power and coal-generated electricity, instead of relying on more expensive imported furnace oil. In addition, the government will have to curtail electricity theft and waste by improving its inefficient transmission and distribution system.

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