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EDITORIAL: In a spirited defence of his signature policy to control the external value of the rupee, former four-time Finance Minister, Ishaq Dar, in his address to the Senate averred that devaluation of a currency is “the mother of all evils” and that a stable currency guarantees economic progress and prosperity in a country.

This economically severely flawed comment shows a mindset that is unable to grasp a basic economic principle, notably that a strong currency acts as an incentive to importers and a disincentive to exporters – a principle that countries with qualified finance ministers have tried to use to their advantage by depreciating the value of their currency rather than appreciating it. To mitigate the possibility of any country depreciating its currency to gain an unfair trade advantage the International Monetary Fund (IMF) as well as the World Trade Organisation (WTO) require, member countries to refrain from manipulation of their currencies. China, for example, was accused by the US of currency depreciation to get an unfair trade advantage with the US and other countries.

Dar during his last two tenures (2013-17 and 27 September 2022 to August 2023) deliberately controlled the rupee-dollar parity with the overarching objective of understating the debt servicing costs that escalated to an unsustainable 45 percent of current expenditure last fiscal year, which he then proceeded to raise further to 54 percent in the current year’s budget.

And implicit in having a strong rupee is the fact that with Pakistan reliant on imports of essential items, including petroleum products and cooking oil, to meet its domestic needs, an overvalued rupee would assist in understating the rate of inflation. However, while as a chartered professional accountant Dar’s focus was understandably on balancing the books yet the outcome on the economy was nothing short of a disaster because imports became cheaper, exports were priced out leading to deindustrialisation.

In 2013-17, Dar’s decision to keep the rupee strong was accompanied by a marked preference for external loans over domestic loans (ostensibly as the rate of mark-up was lower on external loans), which led to a serious balance of payments problem prompting his successor, Miftah Ismail, to allow the rupee to depreciate on the advice of a visiting IMF team late 2017. The depreciation was not enough, 2018 was an election year, which then led to the highest-ever current account deficit in the history of the country that was inherited by the Pakistan Tehreek-e-Insaf (PTI) government and which necessitated going on the twenty-third IMF programme.

Cognizant of Dar’s policy to keep the rupee strong, the IMF insisted on a market determined exchange rate as a prior condition for the 2019 Extended Fund Facility (EFF) programme – a rate determined on the basis of key economic fundamentals (foreign exchange reserves, current account, etc.) rather than by a directive issued by the Finance Ministry. To avert the possibility of the Finance Ministry issuing a directive again, the IMF insisted on the passage of a law by parliament to ensure the autonomy of the State Bank of Pakistan (SBP).

Pakistan has invariably suffered from the executive making a distinction between the letter of the law as opposed to its spirit which led Ishaq Dar, during his last stint as the finance minister in 2022, to influence the interbank rupee-dollar parity – at a time when reserves had plummeted to less than a month of imports which disabled the apex bank from intervening in the market, thereby generating multiple rates. This was unlike the 2013-17 period when the country borrowed large sums from abroad to strengthen its reserves which then enabled the SBP (State Bank of Pakistan) to intervene in the market with those borrowed funds.

Dar’s claims that he met all Fund conditions by January 2023, on the floor of the House, is debunked in the IMF’s 30 June 2023 Stand-By Arrangement documents which state that “after reserves declined to about 3 billion dollars (half month of import coverage) in mid-January 2023 the exchange rate was allowed to depreciate by almost 10 percent on January 26. However, the normalisation in the FX market was short lived, with premium emerging in February (amid a notable appreciation), and again from May onwards.”

Countries like Pakistan, not only rely on exports as a desired form of foreign exchange earnings but also through home remittance inflows. These inflows have been compromised due to the prevalence of the illegal hundi/hawala system in the past; however, with global lockdowns associated with Covid-19 the official channels began to be used and remittance inflows exceeded exports in 2021-22. The attempt to keep the rupee strong last fiscal year led to home remittances plunging by 4 billion dollars last year compared to the year before, and the IMF’s refusal to declare the ninth staff-level agreement a success led to the threat of a looming default on the horizon. The caretaker Finance Minister, Dr Shamshad Akhtar, has earmarked an unbudgeted 70 billion rupees to further incentivize remittance inflows through official channels though time will tell if this measure will be effective.

Dar’s defence of his policy to keep the rupee strong bears testimony to his background as an accountant, who is apparently unaware or chooses to brush aside linkages within an economy. Sadly, he still remains adamant despite the pernicious consequences that had to be endured because of his preference of accounting doctrine over economic principles in managing the economy.

Copyright Business Recorder, 2023


Comments are closed.

KU Nov 30, 2023 10:12am
BR could have saved its readers from this nuisance by just displaying the many shades of his past performance but in our country truth and honesty have become a very rare commodity, especially when there is fear of fixing everyone who dares to think of these as virtues.
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Anila Qadri Nov 30, 2023 12:31pm
Imagine the system has room for corrupt and fool like him
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Hamza Ali Nov 30, 2023 12:49pm
Another dar term would be equivalent of a 9.0 earthquake for Pakistan. Nothing will be left. Depressingly, it appears that he is being brought back.
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Mumtaz Hassan Nov 30, 2023 01:25pm
As another potential victory for PML(N) in the upcoming elections looms, it is anticipated that Dar may assume another term as Finance Minister. Criticism of his performance should focus on his decisions rather than personal attributes, such as being a Chartered Accountant, as everyone has their strengths and weaknesses.
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Faisal Kandhro Nov 30, 2023 02:54pm
Can the writer explain if a country grows 5% a year and depreciates it's currency by 20-25% per year. Which in turn fuels inflation and eventually interest rate hikes and higher debt servicing. If we keep depreciating our currency our GDP would decline USD terms, we are already at 2017 GDP level our growth in 6 years has vanished just because of depreciation.
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Karachi Wala Nov 30, 2023 03:04pm
No country except Pakistan would employ an accountant as finance manager. This is irony that PML-N prefers the family relations on country's economy.
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Johnny Walker Nov 30, 2023 03:32pm
Dar ul Disaster. What do we have to do to avert Dar ul Munshi's next book keeping disaster?
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Zaya Zaya Nov 30, 2023 04:25pm
"the pernicious consequences that had to be endured because of his preference of accounting doctrine over economic principles in managing the economy." There is no World ACCOUNTING Doctrine as such at all, its a fallacy to say that, of managing Economy as such, its PURLY a DAR own Doctrine, a tricky and munafiq mindset.
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SAd Nov 30, 2023 04:28pm
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SAd Nov 30, 2023 04:30pm
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SAd Nov 30, 2023 04:30pm
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Zaya Zaya Nov 30, 2023 04:32pm
@Faisal Kandhro, is that an Economics Theory? Note that the currency was allowed to be market driven during 2018-2022 and Pakistan ended up two years in a row with GDP higher than 5.5%, higher exports, higher remittances, higher industrial production and agricultural growth, plus improved Textile and Large Manufacturing outcomes.
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Az_Iz Nov 30, 2023 06:22pm
Dar is totally incompetent to be a finance minister. Artificially fixing the rupee value is a disaster.
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Mumtaz Hassan Nov 30, 2023 08:28pm
@Zaya Zaya, the writer made mistake in writing that. Your comments are ok.
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Faisal Kandhro Nov 30, 2023 08:40pm
@Zaya Zaya, country grew only in FY21 and 22, exports and remitences only grew because of low base years of Covid. Please follow me here. Low currency only works for the countries with higher manufacturing base, our exports are import substituted. You are actually making it worse for industrialist here by making imports much expensive. Auto industry is evident. Other con is that the fuel prices have surged because of this devaluation which has a major effect on inflation. So who is the idiot here?
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Ch K A Nye Nov 30, 2023 09:37pm
@Mumtaz Hassan, He's a munshi plain and simple. The man still believes that lies and deceit work on the common man. It's time that he realises that there is no longer room for his ruinous policies.
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Ch K A Nye Nov 30, 2023 09:39pm
@Karachi Wala, The family munshi doubles as a laundryman and that's just about all he knows how to do.
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zh Nov 30, 2023 11:19pm
ad news is that ladla's ladla will again be the finance minister after the general's election.
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Ash Chak Dec 01, 2023 09:39am
@Faisal Kandhro, are you ready to sacrifice dollars to keep the rupee stable? Because that was Dar’s strategy. And how long does Pakistan continue on that path?
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ZZQ Dec 01, 2023 09:51am
A good write up. However, felt strongly missing many other variables like "Loss of Investor and even Overseas confidence arising from daily ridiculing Law and Constitution", alienation of Pakistani Diasphora from participating in Pakistan's well being, decades old malicious and criminal supervision of smuggling channels and Hawala Hundi and Money Launderers... These may sound political but are very much the true reasons of this debacle as well and of course the ones whose hands are covered with this filth wil never really care to improve this.
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Start a fire Dec 01, 2023 12:15pm
Conveniently blaming Dar and completely ignoring Khan’s mismanagement. Selective amnesia harms Pakistan.
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Zaya Zaya Dec 01, 2023 02:25pm
@Faisal Kandhro, "our exports are import substituted" Exactly the problem with the Economy. Pakistan does not need "Import Substitution", a failed policy recognised internationally. Export Diversification and New Products development is the need to increase FOREX Earnings and death of well beaten same old is to be welcomed. Same old (status quo) product exports without Value Added emphasis would not suffice.
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Actual Truth Dec 01, 2023 04:42pm
All this is nothing new and everyone literate person with any interest in economy understands the destruction brought upon this country through the 90s and then again from 2008 to 2018. But whatever the case be our overlords are hell bent on bringing the same goons back to ensure destruction of Pakistan with Darconomins. Alas !!!
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Ch K A Nye Dec 01, 2023 05:28pm
@SAd, still with the sad jokes? At least pretend to be serious.
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Ch K A Nye Dec 01, 2023 05:33pm
@Start a fire , there is no amnesia. Dar the destroyer of Pakistan has all the hallmarks of insanity: trying the same thing over and over again and expecting different results. The man is merely a munshi tasked with keeping the family wealth in safe hands.
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