Persisting political crisis in Pakistan, which got worse with the withdrawal of support to the government by two key allies and the assassination of a popular provincial governor, point to a serious governance failure and can further halt the strained IMF standby program aimed at restoring fiscal health, an analyst has said.

Earlier in the week the MQM, a key ally, withdrew its support for the ruling coalition, following a similar move from the JUL-F which pulled out in December. The assassination of Salman Taseer, the governor of the Punjab province, on Tuesday dealt fresh blow to the government and President Zardari.

Political instability, which is never far away in Pakistan, has risen following this week’s assassination of the governor of Punjab province and the withdrawal of another party from the ruling coalition. For now, the Opposition appear intent on keeping the government in office rather than forcing new elections, wrote Kevin Grice, senior international economist at Capital Economics, in a note.

Grice says such a scenario is the worst outcome for the economy. It means that the fall-out with the IMF will probably continue and that the fiscal deficit will stay wide. Accordingly, inflation will likely accelerate which, in turn, will force the central bank (SBP) into hiking rates again at the end of January, he says.

He says that the IMF deal, which has been under strain since the first half of 2010, now looks set to stay in serious trouble. Pakistan has received no funding under the programme since May, other than an emergency loan of $0.46bn to help cope with the flooding in Q3. The floods disaster quickly forced a re-writing of the targets for GDP growth, inflation, and the fiscal deficit. But the underlying problem, as is perennially the case in Pakistan, is the failure of governance. Politicians and institutions are too weak to implement the reforms needed to broaden the tax net and bring government finances under control.

It is already clear that the budget deficit in the financial year 2010-2011 (July-June) will far exceed the revised IMF target of 4 percent of GDP, after reaching 6.3 percent in FY09-10, Grice points out. He says the shortfall is in line to be at least 6 percent yet again, possibly even higher. The consequence of this is that government borrowing from the SBP, which monetises the deficit, adds to inflation pressures, and is supposed to stop under the IMF agreement, has continued to balloon. According to the latest central bank data, government borrowing from the SBP soared to PKR336.6bn in the second half of last year, which was more than four times the scale of the lending in the equivalent period of 2009.