It’s been a whirlwind few months for Pakistan and its governing family, which culminated in a ruling from the nation’s Supreme Court to disqualify Prime Minister Nawaz Sharif from his position. After he was disqualified, he quickly handed in his resignation. So what does the Nawaz Sharif resignation mean for the nation’s economy, and who will be the next prime minister of Pakistan? Many things are up in the air right now, and it may be some time before Pakistanis get any real answers.

Nawaz Sharif resignation
By Prerna goyal (Own work) [CC BY-SA 4.0], via Wikimedia Commons

Nawaz Sharif resignation follows long-running probe

The Pakistan Supreme Court made its ruling after a months-long investigation into Nawaz Sharif’s finances stemming from the Panama Papers leak. Investigators also looked into his family’s finances as they considered the allegations of corruption against him. The court ruled that Sharif had been dishonest when reporting on his finances and accounting for his own vast wealth and that of his family members. Investigators said they found huge disparities between what was reported and the assets that are actually held by the Sharif family.

It should be noted that this is the third time Nawaz Sharif has been removed from power. His first administration also ended with a dismissal on corruption charges, and his second ended after a military coup resulting in exile to Saudi Arabia.

Early election or military coup?

The next general election isn’t set to be held until August 2018, so Sharif’s party will likely appoint a new prime minister to finish up his term, probably his brother Shahbaz Sharif. The Pakistan Muslim League holds 189 of the National Assembly’s 342 seats. However, before Shahbaz can become the next prime minister, he will need to win a National Assembly seat.

However, Capital Economics Senior Asia Economist Gareth Leather said in a note dated July 28 that the Nawaz Sharif resignation raises the possibility of the election being held early. He noted that Imran Khan‘s PTI party has run previous campaigns on an anti-corruption platform, so the party should do well in upcoming elections.

On the other hand, he noted that the PTI also favors “stronger civilian oversight” of the Pakistani army. As a result, he sees a strong possibility of another military coup if the PTI would win that election because of how strong of a role the nation’s military has played in its political system.

A hung parliament is also possible

The Nawaz Sharif resignation is also expected to have an impact on the general election if it is actually held next year at its regularly scheduled time. Hasnain Malik, Exotix Capital’s global head of equities research, believes a hung parliament and coalition government is a likely outcome of next year’s election. However, he also believes that it won’t matter much because he doesn’t feel the Sharif administration had much of an agenda anyway.

“However, it is not as if the PMLN government, despite its outright majority, had an extensive legislative agenda in the first place,” he explained via email. “It would be hard to describe this government as ‘business-friendly’ for documented businesses (as opposed to informal ones) given tax rate increases and subsidy reductions, which effectively are to cover fiscal shortfalls resulting from tax and utility leakages in the informal sector.”

What about CPEC?

In general, Malik sees the Nawaz Sharif resignation as being a positive, even though so many opinions have been of the negative variety. He doesn’t see the Sharif family as being crucial for any of Pakistan’s key economic initiatives, including the China-Pakistan Economic Corridor, or its ongoing security improvements.

Leather, however, sees the resignation as occurring “at a tricky time” for the Pakistani economy. He notes that the Chinese investments that have been pouring in for CPEC and related projects are likely to support near-term growth. He describes the balance of payments as being “in a precarious position,” noting that Pakistan’s trade balance has shifted even further into the red in the last few quarters.

He also pointed out that Pakistan’s central bank has been “running down its foreign exchange reserves to support the rupee.” But policymakers’ efforts may turn out to be all for nothing because if investors lose confidence in the nation following Sharif’s disqualification and resignation, the rupee could suddenly be devalued. The result would be rising inflation and interest rates.

Currency will probably be fine, but medium-term outlook may be poor

Leather sees plenty of reasons to believe the Pakistani rupee will withstand the political crisis because it has been through so much political turmoil throughout its history. In fact, he points out that in Pakistan’s 70-year history, there hasn’t been a single civilian prime minister that has successfully completed their full five-year term. Additionally, the Nawaz Sharif resignation was not much of a surprise.

But even if the near-term results of his resignation end up being small, he warns that Pakistan’s growth prospects in the medium term “remain poor.” He sees Pakistan as a possible haven for low-end manufacturing outfits that are fleeting China because of its “plentiful supply of cheap workers.” He noted that both Bangladesh and Vietnam have enjoyed some success due to this process, but unlike both of those two nations, he believes “drastic improvements” are needed to Pakistan’s “business operating environment” before it will be able to follow in their footsteps.