Finance Minister Ishaq Dar’s words and actions since his return last week have reminded many of PTI (Pakistan Tehreek-e-Insaf) government’s last finance minister, Shaukat Tarin. In fact, in many ways, Dar is behaving like ‘Tarin on steroids’.
The economy cannot afford a rerun of FY22. When Tarin was made finance minister in April 2021, the then PM Imran Khan gave him 18 months to turn the economy around. In less than 12 months since he assumed office, Tarin caused immense harm to economy, precipitating the demise of PTI’s government.
Dar probably has just six months to turn the ship around, possibly even less. Tarin got the reality check in four months when current account deficit went belly up, forcing SBP (State Bank of Pakistan) to raise key policy rates abruptly.
Dar may get schooled much sooner, given how he has chosen to go down the road of bullying international rating agencies and taking a hard line on the chief lender, the IMF (International Monetary Fund).
Pakistan’s policymakers are in no position to dictate terms to the IMF. Shaukat Tarin tried the strong-arm approach and was forced to eat his words.
Macho posturing cannot change the weak fundamentals of the economy. The country needs fiscal consolidation and building of foreign exchange reserves. Dar’s actions may have very well improved the sentiments, but they are likely to cause terribly adverse impacts on economy in less than a year.
Over the last year alone, market sentiments have deteriorated as quickly as they had improved. Pakistan needs a macroprudential approach to fiscal policy. The change of guard at finance ministry shows the coalition government has simply shut its eyes in the face of reality.
There are telling signs. A wrap on the knuckles is that Moody’s has downgraded Pakistan’s credit rating. Moody’s decision may very well be based on old data; however, Dar’s choice of words indicating his plan to give Moody’s “a befitting response” is shocking. Then, following the large fuel price cut, the response from the IMF country head has also failed to inspire confidence.
Dar is trying to communicate the impression that the IMF doesn’t matter, and that he would be able to ‘handle’ the institution. IMF is the lender of last resort, while Pakistan is a distressed borrower. Just like Tarin, Dar’s display of hubris may prove to be his undoing. Unfortunately, the economy and millions of Pakistanis may have to suffer far more than they already have, just to drive that point home.
The tough-guy approach will not work. Dar needs to deal with international financial partners with a little more humility than displayed in his interactions with currency dealers. Dar has many stakeholders to manage and must learn to tread carefully.
The consecutive failures of Asad Umar, Shaukat Tarin, Miftah Ismail, and now Ishaq Dar to rescue the economy risks sending the wrong signal to powers-that-be that political parties simply do not have any economic plan to offer.
Dar can fight the good fight, but that requires him to speak the absolute truth without omission, embellishment, or alteration. For example, it is inaccurate to pretend that Pakistan’s ongoing IMF program is in any way similar to the one in 2013-14. Back then, the country had gone to the IMF for only cheap loans, not because it had faced a currency crisis.
This time, no bilateral partner is ready to lend without the IMF. Back then, PML-N (Pakistan Muslim League-Nawaz) had just been elected with a fresh mandate and a majority in national and Punjab assemblies. This time, it is a lead or senior partner in a weak coalition running out of time.
Macro fundamentals between then and now are simply incomparable. Despite the persistently high fiscal deficit, Dar is on a spending spree. Textile exporters have been given more than what they had asked for. Even the inexperienced Hammad Azhar under PTI held his own on the negotiating table for much longer.
Dar has also frozen the petroleum levy without IMF’s consent. He has turned down gas price hike recommendation vis-à-vis the Sui companies. Dar is placing big bets on the economy, except these are not his chips to gamble away. Dar’s attempts to pacify domestic audience are making his foreign stakeholders jittery. This is well depicted in the Eurobond yields.
Dar’s obsession with currency killed the economy once, and may do so again. He wants PKR/USD to come under the psychological level of 200. With every passing day, his urgency is rising. He wants the exchange rate to fall in days, not weeks.
And in the same breath, he wishes to decrease the interest rates. The screws will need to be tightened on the monetary side if Dar further loosens up the fiscal policy. However, any display of haqeeqi azaadi (real freedom) by SBP in its decision making may further test Dar’s patience.
Copyright Business Recorder, 2022