Daronomics has been a subject of intense political and economic debate
akistan Muslim League-Nawaz stalwart Ishaq Dar has finally arrived, taken oath as a senator and assumed the office of federal finance minister. His second-coming has raised several economic, political and legal questions.
Dar’s arrival has elements of an intriguing drama. He had left Pakistan in 2017 when cases started piling up against him and the Sharifs in the courts. Now, he has returned under full media glare and some of the cases against him look set to evaporate into thin air.
Is the change in Dar’s fortunes linked directly to power dynamics of Pakistan? Does it amount to a tacit admission by the ‘neutrals’ that the ‘hybrid’ system preferred for four years has not worked and that their ‘neutrality’ is the best guarantee of national interests? The quick reversals in the courts also raise questions about the quality of judicial institutions. Was a series of criminal cases framed against Dar politically motivated in the first place, or are different standards being applied in individual cases in the courts? Accountability and judicial institutions need to address public perceptions on these issues.
Pakistan is currently dealing with one of its worst natural disasters. Economic losses resulting from the devastating floods have been estimated to be in excess of $30 billion. The relief and rehabilitation challenges are hue for a country already reeling from economic vulnerabilities. Post-flooding disease outbreaks and social unrest have been adding to the complications. Pakistan is also fighting its case on international forums for environmental justice. As such this would not appear to be the best time for a change in the top economic management of the country.
Apparently Miftah Ismail’s handling of the economy following the ouster of Imran Khan has been the reason behind the change of guards. When the PDM coalition took charge, the prospects of Pakistan defaulting on its sovereign liabilities looked imminent. As a result of Pakistan’s understanding with the International Monetary Fund (IMF) for the continuation of the multi-billion-dollar bailout package, petroleum prices and the cost of utility bills went through the roof. The value of the rupee has eroded beyond belief. Phasing out of the subsidies and tax increases have left virtually everyone in Pakistan in shock. The economy has been witnessing one of the highest inflation rates in its history. Whether any viable alternatives were available to Miftah Ismail is debatable. The PDM is apparently betting on Dar to come up with a better strategy to put the national economy back on track without hurting the masses.
Can he deliver? Let us try to understand Dar’s vision of a vibrant economy. In a recent interview, he was reported to have said that when Nawaz Sharif was ousted, Pakistan’s economy was growing at a robust rate and could have become the 18th largest economy in the world by 2023. Dar’s policy menu was a combination of low interest and inflation rates, stable macroeconomic indicators, high economic growth rates and a high level of foreign reserves backed by a strong national currency.
So why was Pakistan was forced to approach the IMF for a bailout in the early days of Imran Khan’s government?
Given Dar’s first few days in office and his focus on setting right the dollar-rupee parity, there are genuine fears that the economy may see a boom in the short run only to get into deeper trouble. The long-run solution is to reform and restructure the economy.
The policy options pursued by Dar during his several stints are sometimes called Daronomics. Daronomics has been a subject of intense political and economic debate. Daronomics is primarily characterised by a focus on the exchange rate stability. Dar, say some critics, kept the rupee overvalued. He allegedly influenced the central bank into injecting dollars into the market to support the rupee. This allegedly forced Pakistan to seek a bailout from the IMF in 2018.
One might ask what is wrong with keeping the value of the rupee fixed relative to the dollar. Does not an overvalued Pakistani currency make external liabilities smaller?
The true value of a currency is determined by its ability to generate foreign exchange. There are several ways to bolster foreign exchange reserves, including an increase in exports and a reduction in imports, increasing remittances and attracting investment. Probably the worst option is to shore up forex reserves by borrowing. Once the supply of the dollar exceeds the demand for it, its value relative to the rupee declines.
A close scrutiny shows that policy options to influence these factors in the case of Pakistan are quite limited. Consider exports. Pakistan mostly exports products at the primary stages of the value chain. Given the low levels of technological sophistication, and low productive capacity of the labour force, exports have a limited role in shoring up forex reserves. An overvalued currency can quickly deprive the exports of competitiveness in the international markets.
At the same time, an overvalued currency makes the imports cheaper and raises demand for luxury items and other consumer goods. Add to this the cost of borrowing dollars, an overvalued currency looks disastrous.
An overvalued currency during flood relief, rehabilitation and reconstruction may have disastrous consequences. We are in dire need currently to reallocate resources away from debt repayment to the relief and rehabilitation of the flood survivors. If the international community injects significant aid-related funds there would be a temptation again to overvalue the currency, resulting in import-driven, consumption-led growth in the short-run. The boom may vanish after the supply of dollars dries up. Another bailout package will be needed then.
The space within which Dar can practice his wizardry has been significantly constrained sine he left in 2017. Back then, the PML-N called the shots as the largest party in the parliament and Dar was mockingly called the deputy prime minister – a reflection of the disproportionally broad scope of his mandate in dealing with politicians, interest groups and the military establishment. Today, the government is supported by a weak and diverse coalition and the State Bank is autonomous.
Since 2018, the PML-N has lost much political ground despite massive governance failures of the PTI government. At its core, the PML-N is a traditional political party struggling to come to terms with the changing times. If history is any guide, it can perform relatively well in the elections, especially in the Punjab, but its street power is no match for the charged crowds some other political and religious parties can attract. In the virtual space, it is nondescript. It has never effectively challenged the PTI’s narratives – true or false - channelled 24/7 through social media.
Pakistan is labouring under harsh IMF conditionalities and the SBP has been made autonomous. Given Dar’s first few days in office and his focus on setting right the dollar-rupee parity, there are genuine fears that the economy may see a boom in the short run only to get into deeper trouble. The only long-run solution is to reform and restructure the economy and reduce its dependence on import-driven consumption.
The writer is an associate professor in the Department of Economics at COMSATS University Islamabad, Lahore Campus