The mainstay of the Muslim League of Akistan-Nawaz, Ishaq Dar, finally arrived, was sworn in as a senator and assumed the post of federal finance minister. His second coming raised several economic, political and legal questions.
Dar’s arrival has elements of an intriguing drama. He had left Pakistan in 2017 when cases started piling up against him and the Sharifs in court. Now he has returned to the media spotlight and some of the cases against him look set to evaporate.
Are Dar’s change in fortunes directly related to power dynamics in Pakistan? Is this a tacit admission by “neutrals” that the “hybrid” system favored for four years has not worked and that their “neutrality” is the best guarantee of national interests? Rapid court reversals also raise questions about the quality of judicial institutions. Was a series of criminal cases against Dar politically motivated in the first place, or are different standards applied in individual cases in court? Accountability and justice institutions must take into account public perceptions on these issues.
Pakistan is currently facing one of its worst natural disasters. Economic losses from the devastating floods have been estimated at over $30 billion. Relief and rehabilitation challenges are significant for a country already reeling from economic vulnerabilities. Disease outbreaks and social unrest after the floods compounded the complications. Pakistan also advocates its cause in international forums for environmental justice. As such, this does not seem like the best time for a change in the country’s top economic leadership.
Apparently Miftah Ismail’s handling of the economy after Imran Khan’s ousting was the reason for the changing of the guard. When the PDM coalition took the reins, the prospects of Pakistan defaulting on its sovereign debt seemed imminent. Following Pakistan’s agreement with the International Monetary Fund (IMF) to continue the multi-billion dollar bailout, oil prices and the cost of utility bills soared. The value of the rupee has eroded beyond belief. The phasing out of subsidies and tax increases has left virtually everyone in Pakistan reeling. The economy has experienced one of the highest inflation rates in its history. Whether viable alternatives were available for Mifth Ismail is debatable. The PDM is apparently betting on Dar to find a better strategy to get the national economy back on track without hurting the masses.
Can he deliver? Let’s try to understand Dar’s vision of a dynamic economy. In a recent interview, he reportedly said that when Nawaz Sharif was ousted, Pakistan’s economy was growing at a rapid pace and could have become the 18e the largest economy in the world by 2023. Dar’s policy menu was a combination of low interest rates and inflation, stable macroeconomic indicators, high economic growth rates and a high level of reserves exchange rate supported by a strong national currency.
So why was Pakistan forced to approach the IMF for a bailout in the early days of Imran Khan’s government?
Given Dar’s early days in office and his keenness to restore dollar-rupee parity, there are genuine fears that the economy could experience a short-term boom only to find itself in deeper trouble. The long-term solution is to reform and restructure the economy.
The political options pursued by Dar during his many stays are sometimes called Daronomics. Daronomics has been the subject of intense political and economic debate. Daronomics is primarily characterized by its emphasis on exchange rate stability. Dar, some critics say, has kept the rupee overvalued. It would have prompted the central bank to inject dollars into the market to support the rupee. This would have forced Pakistan to seek a bailout from the IMF in 2018.
One might wonder what is wrong with keeping the value of the rupee fixed against the dollar. Doesn’t an overvalued Pakistani currency reduce foreign liabilities?
The true value of a currency is determined by its ability to generate currency. There are several ways to strengthen foreign exchange reserves, including increasing exports and reducing imports, increasing remittances, and attracting investment. The worst option is probably to shore up foreign exchange reserves by borrowing. Once the dollar supply exceeds the demand, its value against the rupee decreases.
Close examination shows that the policy options for influencing these factors in the case of Pakistan are quite limited. Consider exports. Pakistan mainly exports products at the early stages of the value chain. Given the low levels of technological sophistication and low productive capacity of labor, exports play a limited role in strengthening foreign exchange reserves. An overvalued currency can quickly deprive exports of competitiveness in international markets.
At the same time, an overvalued currency makes imports cheaper and increases the demand for luxury items and other consumer goods. Add to that the cost of borrowing in dollars, an overvalued currency looks dire.
An overvalued currency during flood relief, rehabilitation and reconstruction operations can have disastrous consequences. We currently urgently need to reallocate resources from debt repayment to relief and rehabilitation of flood survivors. If the international community injects large aid-related funds, the temptation would once again be to overvalue the currency, leading to import- and consumption-led growth in the short term. The boom may fade after the supply of dollars has dried up. Another rescue plan will then be necessary.
The space in which Dar can work his magic has been significantly restricted since his departure in 2017. Back then, the PML-N was calling the shots as the largest party in parliament and Dar was mockingly called the Deputy Prime Minister – a reflection of the disproportionate breadth of his mandate in his dealings with politicians, interest groups and the military establishment. Today, the government is supported by a weak and diverse coalition and the State Bank is autonomous.
Since 2018, the PML-N has lost a lot of political ground despite the massive governance failures of the PTI government. At its core, the PML-N is a traditional political party struggling to adapt to changing times. If history is any guide, it may do relatively well in elections, particularly in Punjab, but its street power is no match for the packed crowds that some other political and religious parties may attract. In virtual space, it is indescribable. He has never effectively challenged the PTI narratives – true or false – being broadcast 24/7 via social media.
Pakistan is subject to harsh IMF conditionalities and the SBP has become autonomous. Given Dar’s early days in office and his keenness to restore dollar-rupee parity, there are genuine fears that the economy could experience a short-term boom only to find itself in deeper trouble. The only long-term solution is to reform and restructure the economy and reduce its reliance on import-driven consumption.
The author is Associate Professor in Department of Economics, COMSATS University Islamabad, Lahore Campus