Senator Ishaq Dar has been sworn in as the new finance minister of the coalition government headed by Prime Minister Shehbaz Sharif. Although the new finance minister will run essentially the same economic policy for the same political leadership, this change of guard is widely being seen as a pivot to easier money, lower inflation, and higher growth. This view is justified based on the objective condition of Pakistan’s economy as well as the external environment. Our circumstances today are a far cry from the dire straits of about four months ago when former finance minister Dr Ismail came in. The imminent threat of default on external obligations has subsided thanks to the revival of a stalled bailout programme from the IMF. International petroleum prices are coming down. The energy sector is somewhat better managed now. UN Secretary-General Antonio Guterres and other influential voices are pressing the global financial system to allow Pakistan fiscal space in the wake of the epic devastation wrought by flooding. The IMF is itself amenable, on humanitarian grounds, to allowing the government fiscal leeway on energy subsidies, petroleum levy, etc. All in all, while huge challenges remain, much of the gloom of a few month’s back has lifted – thanks in no small part to the diligent handling of Dr Ismail, who must be thanked for a job well done.
Dar’s signature approach to managing Pakistan’s economy – popularly dubbed as Darnomics – has plenty of takers both at home and abroad. Pakistani businesses have not forgotten how he put the country’s economy on an even keel in the wake of heavy international economic sanctions against Pakistan in the wake of the country’s 1998 nuclear tests. Consumers have come to associate his management of the economy with relatively stable prices and low inflation. However, Darnomics has its critics too – in particular those who take a dim view of his support for a strong rupee, some even accusing him of keeping the rupee artificially overvalued.
In any case, the markets act on appearances and sentiments as much as they do on economic fundamentals – as evidenced by the rupee’s surprising recovery following the news of Dar’s return. The local currency unit has appreciated by more than Rs10 to a dollar over the last couple of days in the open market. This bears witness to Dar’s reputation for backing a strong rupee rather than his actual knack for the task. The finance minister would do well to take a good look at what is actually happening under the hood rather than exulting in how his return has strengthened the rupee. Getting to the bottom of this matter should be high on the finance minister’s agenda.
As for the actual inflation and exchange rate going forward, Dar must know that the paradigm for economic management has somewhat shifted while he was away. Pakistan has committed to a free-floating currency, and the State Bank of Pakistan now has an independent constitutional mandate instead of being beholden to the finance ministry for monetary policy direction. This means the levers of exchange rate and repo rate are not the finance ministry’s to manipulate at will anymore. How he adapts his approach to suit the newfangled economic management paradigm – and how successfully he helms the country’s economy through these turbulent times will be a direct measure of his acumen and finesse.
Looking at it another way, Dar has been the PML-N’s economic point man since forever. He is returning to front the government’s pivot from economic stabilization to growth at a time when Dr Ismail has done all the dirty work required for stabilization. His brief is to institute policies that help the ruling coalition recoup some of the political capital it lost while backing Ismail’s tough love. Dar’s job will be to maintain and strengthen fiscal discipline and lay down robust ground rules for prudential management. Also, he has to create fiscal space for the ongoing rescue and relief work in the wake of the devastating floods. The arduous work of reconstruction will be next, which will in turn call for massive funding. Then there are the people, hungry for a reprieve after years of runaway inflation and soaring energy and food prices. Easing their circumstances is by all means a hallowed mission for the new economic czar. Equally importantly, it is Dar’s duty to keep the country’s IMF-backed economic reform program on track to exorcise the macroeconomic distortions haunting Pakistan’s economy.