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Friday December 02, 2022

Dar’s return: hope vs experience

By I Hussain
October 02, 2022

The stock market and the dollar rising in unison after the announcement that Ishaq Dar was to take over as finance minister was quite surprising as I don’t expect that Mr Dar will be pulling any rabbits out of a hat given the current state of the economy.

On the contrary, the move smacks of desperation by the government because Mr Dar has at most less than a year before the next election if he’s to make a mark. Hardly enough time to get his priorities straight let alone prove to the business community that he’s got the answers to put the economy on a path of sustainable growth.

Specifically, the new finance minister will find he’s in a different place than he was the last time he held the same office. For one, the State Bank of Pakistan is now independent of the finance ministry’s diktat so avowing, as Mr Dar did soon after taking the oath of office, that he intends to lower interest rates is not something that can be taken seriously since it’s not his decision to make.

Further, saying that interest rates should be lower may be music to the ears of investors in the stock market and to Big Business but it’s nothing more than wishful thinking. With most major economies raising interest rates to prevent their currencies from overheating and their currencies sinking against the resurgent dollar it’s hardly to be expected that Pakistan’s fragile economy and currency will sidestep the ongoing cycle of rising interest rates. (Even Switzerland, that supposed oasis of sound finances, increased its interest rate three months ago for the first time in fifteen years and repeated the move a few days back).

With the floods having ravaged the cotton and rice crops – Pakistan’s surefire foreign exchange earners – and the need to import basic food items, the balance of payments will also be under severe pressure as will the rupee’s value against major international currencies.

Another major difference from Mr Dar’s previous tenure as finance minister is that the government in the Punjab province is now controlled by the opposition which leaves little room for financial maneuvering between the center and Punjab or for doling out financial favours in the country’s largest province.

Then there’s the recessionary situation in the world economy. The economies of the European Union and the UK are being roiled due to cost-push inflation resulting from massive energy price hikes which means poor prospects for Pakistan’s exports particularly textile manufactures.

In 2013, when the PML-N formed the central government, the economy was in the doldrums. The previous five years of the PPP (2008-2013) were one where per capita incomes rose only slightly. Thus real per capita Gross National Income (GNI) grew cumulatively by a paltry 7 per cent or a compounded annual average growth rate of 1.4 per cent from 2008 to 2013.

One must give credit to the PML-N and Mr Dar for overseeing a period of respectable economic growth after the lacklustre PPP term of office. Under the PML-N, average real per capita GNI grew at a healthy rate of 3.5 per cent per annum over 2013-2018.

However, there was a fly in the ointment. Inflation was kept in check not least by keeping the exchange rate at a stable rate against the dollar. This became the centrepiece of the Dar economic strategy.

This strategy had however one overwhelming weakness that was pointed out by independent economists at the time but became painfully obvious later: to wit, unless domestic inflation is kept in line with trading partners’ inflation benchmarks the exchange rate will become uncompetitive, thereby adversely impacting the current account of balance of payments.

Because our inflation rate (the GDP deflator rose by 20 per cent between 2013-2018) far outstripped major trading partners’, where there was instead fear of deflation, an overvalued rupee was the result. Not surprisingly, the current account deficit soared from $3.1 billion (or 1.3 per cent of GDP) in 2014 to $19.2 billion (or 6.1 per cent of GDP) in 2018.

According to the Asian Development Bank’s data, Pakistan’s total external debt rose from $58 billion in 2013 to $94 billion in 2018. However, what was being added to the State Bank of Pakistan’s reserves through borrowing and swap arrangements was fast being depleted in a bid to prop up an overvalued rupee.

Mr Dar ignored the fact that keeping an exchange rate artificially overvalued at the same time that the country allows unrestricted transfers of foreign currency by local businesses and individuals is an open invitation to capital flight. This ‘après moi le deluge’ attitude is what put the country’s finances in a parlous state leaving the successor PTI government no choice but to approach the IMF for a bailout.

What is also perplexing is why Miftah Ismail, the former finance minister, was made a scapegoat despite the efforts he and Dr Aisha Ghaus Pasha made in getting the IMF programme back on track.

Dr Ismail had been dealt a poor hand when he took office six months ago with the economy and the rupee in free fall and did what he could to stabilize the economy and the exchange rate. His major feat is to stave off the Sri Lanka type debt default that was imminent a few weeks back. This he achieved despite constant sniping from Mr Dar ensconced in London on ‘medical’ grounds and Mr Shaukat Tarin, the former finance minister in the PTI government, stewing on the sidelines and trying to set roadblocks to the IMF agreement.

The question to ask is whether anybody else from any of our political parties would have done any better. My answer is an unequivocal no.

The problem with Dr Ismail, as far as the PML-N bigwigs are concerned, is that he is a technocrat first and foremost which means he finds it difficult to shade the truth. And as a technocrat it’s difficult to tell your leaders what they want to hear rather than relaying the facts as they are.

Further, as the economy is constantly being influenced by myriad factors its trajectory is difficult to forecast. So if one thinks that, say, the dollar-to-rupee exchange rate can be controlled short of stringent administrative regulations (that create distortions of their own) then they should take a course in basic economics.

Past experience suggests that there is little payoff for changing key economic personnel in pursuit of quick fixes. For instance, during the PPP’s stuttering economic performance we had six finance ministers (Naveed Qamar was handed the portfolio twice) while Imran Khan changed his finance minister four times during his three-and-a-half-year term as prime minister. The PTI’s economic record is mediocre at best but they did have to contend with the Covid-19 pandemic.

In summary, without fundamental structural reform, that our political parties are loath to undertake, the economy is stuck in a ‘stop-go’ loop and every finance minister is set up for failure as their first order of business is to put out the fires started by the previous government. Hence, changing the finance minister is mainly a political move to suggest that the government is doing something – anything – to get the economy moving. The only people who benefit from this kind of change are the rentier classes who support one individual or another.

As for the rise of the rupee and the stock market – expect a reversal sooner rather than later.

The writer is a group director at the Jang Group. He can be reached at: iqbal.hussain@janggroup.com.pk

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