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Wednesday December 07, 2022

Darnomics

September 28, 2022

LAHORE: Though Ishaq Dar has been widely criticised for his economic policies, Darnomics did put Pakistan on a growth path from 2014-17. He is accused of keeping the rupee over-valued, but he successfully convinced the International Monetary Fund (IMF) on his stance.

Critics never appreciated the improvement in economic indicators, which were lauded by all creditable global institutions at that time. They contended that inflation was tamed due to lower oil prices, which is partly true. But they failed to realise that inflation level at that time was higher in India or Bangladesh that also benefited equally from price fall.

The interest rates during his tenure came down sharply. Banks had surplus cash for loans, though the critics used to say that the government borrowing has crowded out the credit of the private sector.

They failed to appreciate that when interest rates were high, the banks were very much interested in loaning out to the government. But with low interest rates, they started preferring the private sector that pays higher premium than the government above the State Bank discount rate.

No bank even with surplus cash gives loans to companies with tainted balance sheets. Those that have healthy balance sheets are always accommodated.

Critics point out that the rupee was overvalued that hampered exports and boosted imports. The rule of thumb propagated by most of these experts in the past was that if the country has foreign exchange reserves that could finance more than three months imports there was no pressure on the rupee value.

The State Bank of Pakistan at that time had foreign reserves that could finance about four months of our imports. Dar confronted the IMF on the strength of those reserves.

This time around he would make efforts to boost reserves by all means (even by buying dollars from open market).

He would again try to keep dollar in check through administrative measures (he will also flood the market with dollars to control its value).

Even if the argument that the rupee is weak is accepted, it is in Pakistan’s interest to keep the rupee strong as our imports are more than double our exports.

Devaluing rupee by a higher percentage would trigger inflation in the country as there would be a high increase in the rates of all imported items as the duties would have to be paid on a higher amount.

As far as exports are concerned it has been proved beyond doubt that exports remain almost stagnant in all depreciations of the past. Dollar rate has doubled in the last four years, while the exports have inched up from $24 billion in 2018 to $31 billion in 2022.

Majority of exporters see Dar, the finance minister, as a villain because for the first time he confronted the highly influential exporters by refusing to bail them out through subsidies and incentives.

He had in fact learnt his lesson from history when the textile sector was granted relief on loans whenever they were in trouble.

This benefited the efficient producers immensely that expanded their capacities regularly and stayed much ahead of moderately efficient producers.

The exports however remained under stress during his four years stint as finance minister. The exports started going up gradually.

His policies laid the foundation of the shift from low value-added exports to higher valued exports in both textile and leather sectors. The trend set then is paying dividends now.

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