PML-N’s (Pakistan Muslim League-Nawaz’s) finance czar and rupee-stabiliser, Ishaq Dar, is back in the saddle. Many describe him as Pakistan’s economic messiah, while others are worried that he will wash away all the tough and painful work done under his predecessor Miftah Ismail.
Dar’s stated economic agenda is to strengthen the Pak Rupee, tame inflation, and lower interest rates. Dar is an accountant by training, and doesn’t shy of acting like one. He downplays the trade-off between currency and interest rates, rejecting the notion that lowering both at the same time can prove fateful.
Dar’s return has both political and economic implications. On the political front, it has cemented the impression that the current government may be able to stave off demands for early elections and withstand pressure from the PTI (Pakistan Tehreek-e-Insaf). However, this is contingent upon his performance on the economic front. And how PTI reacts to it, of course. This means that the next few weeks of Dar’s performance will be critical.
The first message the market players have received on Dar’s appointment as finance minister is that the government is now serious to crack down on price gouging, market manipulation, and speculative practices – especially in currency markets and banking sector. The message has weight because Dar has demonstrable experience in dealing with such practices, although critics insist current circumstances are qualitatively different. Moreover, if history is any guide, the gains from such coercive behavior almost always prove short-lived.
Dar’s strategy is to strengthen the PKR, and then focus on reducing inflation, along with a reduction in the interest rates. Be careful, sir.
On PKR, there is no firepower to defend the currency, as reserves cannot be depleted further (a no-no as far as IMF is concerned). On inflation, there is room to deploy administrative measures to crack down on hoarding, smuggling, and profiteering, but a very heavy-handed response may create market distortions beyond the supply-demand imbalances, especially in food-related supply chains. And on interest rates, it is inadvisable to reduce interest rates at a time when the monetary policy tightening needs to be sustained along with fiscal belt-tightening.
Dar’s arrival coincides with renewal of tailwind for Pakistan’s economy, with promise of international assistance’s return due to floods. The credit goes to the current government on showcasing floods as a profound catastrophe which will allow room to maneuver in an otherwise very narrow path under the IMF programme. The opportunity must be capitalised to stabilise the economy: such as getting access to external financing (or debt swaps) for climate-change adaptation. However, these inflows may take time to materialize and require a stable political setup.
The first challenge is to negotiate with the IMF, again. The Shehbaz-led government has three demands. One is the frontloading of tranches. Second is to freeze petroleum levy and subsidize fuel price adjustment (FPA) on electricity bills. And the third is fiscal adjustors, so as to not trigger contingencies (of imposing additional revenue measures) due to fiscal slippages.
Then the government is pinning hopes on multilaterals – World Bank, Asian Development Bank, and Asian Infrastructure Investment Bank. There are indications of repurposing existing commitments towards floods while the government is trying to secure additional financing. The total amount expected (including repurposed loans) is around $5-5.5 billion till June 2023.
The third element is of debt restructuring. Here the government’s best bet is gaining moratorium on the Paris Club which will offer a relief of $1.2 billion this fiscal year. However, this is contingent upon similar treatment from China (biggest bilateral lender of $23 billion). If China agrees, the total benefit would be around $2 billion.
The lucky break Dar has is the fall in international commodity prices – especially oil. Miftah’s luck was the worst on this count. The poor chap received bashing from both sides of the aisle. It is sad to see that the PML-N leadership scapegoated Miftah, arguably the best finance minister the country has seen in a while. And now Dar will capitalize on the positive spillovers from the measures taken by Miftah. The risk is that Dar may seriously jeopardize Pakistan’s economic sustainability by priming the pump right before elections; just as Shaukat Tarin laid to waste the stabilization measures taken under Dr Hafeez Sheikh.
There is some breathing space; but it won’t be enough to turn the economy around. Dar cannot control economy the way he did the last time around 2013-17.
Dar’s actions – along with political instability due to dharna and the Dawn Leaks – directly resulted in the 2018 macroeconomic crisis. And those who praise Dar for managing PKR in 1998 should not forget that he froze $11 billion of foreign currency accounts. Those memories are still fresh for most businesses, and high net worth individuals.
He also defaulted on external debt payments and imposed capital controls in their worst form. And while there may have been some sympathy among Gulf states for the sanctioned economy after May 1998, friendly countries are acutely aware that the crisis is of our own making this time round.
Dar must tread very carefully, and must not gamble away foreign reserves under hubris. Already, his statements viz. reducing interest rates and appreciation of currency (at the same time) have grown fears of default on the Eurobond maturing in December 2022.
The bond is trading at $84 on the sovereign promise to pay $105.5 in less than three months. Given a rapid fall in oil prices, Dar is eyeing a reduction energy prices. Such actions will be fraught with risks: it is time to consolidate the fiscal side to lower the current account deficit and build reserves.
Dar’s unhealthy obsession with currency parity may turn things very tricky for Pakistan in days to come. Bond investors are extremely wary, while IMF and other international lenders are not giving good vibes. Dar must not become a prisoner of his own shadow. PML-N’s leadership must not allow him to sacrifice Pakistan’s economic interest in a bid to regain lost political capital.
Unfortunately, the opposition under Imran Khan is happy to box PDM (Pakistan Democratic Movement) into a corner, forcing PML-N to act in a populist manner. Unless Pakistan’s power elite enter a grand political bargain, the economic prospects over coming years may turn very bleak. If things truly go south, 2019-2022 would look like a dream in comparison.
Copyright Business Recorder, 2022