What’s all this fuss about (former finance minister) Isahq Dar and the dollar? And why did markets, both equity and currency, present him a guard of honour even before he landed at Noor Khan air base on a special plane; and long before he took oath as senator? Nothing fundamentally changed between the time when Miftah Ismail handed in his resignation and the sentiment of Ishaq Dar’s takeover took over.
Yet markets rebounded as if a knight in shining armour was returning from self-imposed exile, despite fragile health that forced him into intensive care even when courts demanded his presence back home, to drag the rupee back to his once feverish obsession of 100 to the dollar.
For one thing, it’s no longer his business to fiddle with the rupee, which is now effectively, and (for intents and purposes) finally, the central bank’s jurisdiction thanks to the conditions of the Extended Fund Facility (EFF). That would imply that the days when the finance minister (read Dar) could, and indeed would, announce the interest rate decision a good day before the Monetary Policy Committee (MPC) are long gone. And for another, he couldn’t even if he wanted to. There are, of course, always ways of getting your guy at the state bank to play along, but this time that guy is not likely to do it because of the state’s agreement with the International Monetary Fund (IMF).
In the short time his health has improved and he’s rushed back to the ministry he’s not said much except that his “aim is to break contraction in the economy and change its direction.” And that he’s looking to shift course to high growth, low interest rate and a stable rupee. He didn’t explain of course, at least not yet, how he’d get the State Bank of Pakistan (SBP) to reverse the hawkish interest rate cycle, now a truly global phenomenon, and how that would prop up the rupee. Especially when the dollar’s epic rise is confounding pundits and knocking the wind out of far more stable currencies like the euro, pound and yen. And even as markets are celebrating his return, nobody’s quite sure how he’ll “change course to high growth” when the double whammy of IMF’s painful structural adjustment and the impact of the floods has just shaved a couple of percentage points off GDP.
Poor old Miftah, a Wharton PhD and a decent fellow – both rarities in Pakistan’s unqualified and toxic political elite – will now be remembered as the guy who got it wrong, even by his own party, which is very unfair. Because it wasn’t really possible to do a better job of avoiding a head-first crash after the previous administration unwisely froze energy prices and dumped the IMF program, leaving the sovereign spiraling towards default. Now, as all eyes turn towards the man whose “Darnomics” was defined by inflating the rupee at the cost of piling up debt and burning through reserves, the important debate about how close we really came to default this time is simply not going to take place.
But what if Dar isn’t able to deliver any better than Miftah as the weeks and months pass? The rupee is deeply oversold, no doubt, but the only way to turn course in the immediate term is through aggressive and repeated interventions. While the new finance minister has never had any problems with such things, fiddling with the market-determined float right now will most definitely upset the Fund, even paralyse the bailout program once again. And all he needs to do is give his predecessor a call to know how that plays out.
All things considered, Nawaz Sharif seems to have rolled the dice and settled for Dar as a desperate, optics-driven decision to appease public sentiment. But it will take a lot more than throwing Miftah under the bus so cruelly to sustain a market turnaround.
It’s far more likely to cause unnecessary friction with SBP at a very inopportune time, put hurdles in the way of the IMF program, and give the street opposition just the kind of cannon fodder that it thrives on than magically elevate the rupee back to 100 to the dollar.
Copyright Business Recorder, 2022
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