Challenges before Ishaq Dar | Political economics
a recent publication by the World Bank, World Bank Regional Economic Updates – October 2022 noted that most South Asian countries are already facing high commodity prices, supply bottlenecks and financial sector vulnerabilities. The war-informed geopolitical situation in Ukraine amplifies these challenges, worsening inflation, increasing fiscal deficits and deteriorating current account balances.
Given the current situation, governments must carefully plan monetary and fiscal policies to counter external shocks and protect vulnerable classes. Simultaneously, the war and its impact on fuel prices is providing the region with the much-needed stimulus to reduce its dependence on fuel imports and shift to alternative, green and cheaper energy resources.
Against the backdrop of this difficult global economic situation, a change of command took place in Pakistan with the resignation of Miftah Ismail and Muhammad Ishaq Dar taking office as Federal Minister of Finance for the fourth time. For decades, Dar was the “inside” economic aide to the Pakistan Muslim League (Nawaz). Whenever the PML-N has had the opportunity to rule the country, Dar has been their first choice.
The reins of the economy were handed over by Pakistan Tehreek-i-Insaf (PTI) to the Pakistan Democratic Movement (PDM) coalition government in April this year. The next government found itself between the devil and the deep sea as the economy headed rapidly towards external default. A default appeared imminent when talks with the International Monetary Fund (IMF) to resume the Extended Financing Facility (EFF) arrangement broke down. With limited options on the table, Miftah Ismail, the former finance minister, took the bold step of rolling back the unsustainable fuel and energy subsidies announced by the PTI government in his dying days before being ousted of his functions by a motion of censure.
The economic landmines laid by the PTI were cleared by the PDM government which in the process lost significant political capital. It is an undisputed fact that Miftah Ismail avoided the risk of default and managed to negotiate the resumption of the EFF agreement with the IMF. However, the political measures taken in the process have eroded the purchasing power of the common man.
The rupee has seen the worst episodes of devaluation, losing more than 30% of its value against the US dollar in one month; inflation has soared and the consumer price index (CPI) for July to August was recorded at 26.1% compared to 8.4% for the corresponding period in 2021.
The government has taken several steps to manage the challenge of foreign exchange reserves. As a result of these measures, the current account posted a deficit of $1.9 billion for July-August of the 2023 financial year, compared to a deficit of $2.4 billion for the corresponding period last year.
An increase in exports also helped reduce the deficit. Exports grew by 11.3% in the July-August 23 fiscal year and reached $5.1 billion. As a result, the trade deficit for July-August FY23 was recorded at $6.0 billion compared to $6.8 billion last year.
The immediate task of the new finance minister is to pull the country out of stagflation. If this situation persists, it will most likely lead to business closures resulting in high unemployment and low incomes, both domestic and exported..
Challenges such as historic flood disruptions, high inflation and import restrictions made the overall business environment extremely difficult and caused the large-scale manufacturing index to fall to negative growth of 1, 4% in July for fiscal year 2023, compared to growth of 4.4% in the corresponding period last year. . It is pertinent to mention that despite the floods and import restrictions, the Federal Board of Revenue was able to exceed the assigned target of Rs 22.5 billion in the financial year 2023 from July to August and net revenue collection (provisional) increased by 9.7% to Rs. 948.1 billion from Rs 864.5 billion in the same period last year.
The immediate task of the new finance minister is to pull the country out of stagflation. If the situation persists, it will most likely lead to business closures leading to high unemployment and low incomes, both domestic and exported. Businesses urgently need respite. Inflation and interest rates need to be brought down to more reasonable levels and exchange rate adversities managed so that profitable business can be undertaken.
While Pakistan was able to avoid an immediate default, given the expectation of a global recession and a slowdown in the local economy, the risk is far from over. Keeping exports and foreign direct investment (FDI) at a reasonable level to keep the current account balance at a desirable level will be a daunting task.
Moreover, with strict conditions imposed by the IMF, Pakistan has very limited fiscal and administrative space to exercise its discretion. From frequent fuel price adjustments, tariff reviews, imposition of taxes and free floating of the currency to policy measures by the State Bank of Pakistan (SBP), almost all macro-economic actions are subject to IMF approval.
Ishaq Dar is known for maintaining a balance between the goals set by lenders and protecting the socio-economic interests of citizens. He is Pakistan’s only finance minister to have completed an IMF program and that too, with historically low inflation and policy rates and high GDP growth coupled with positive FDI figures. During his last term in 2013-2017 and previously in 1997-1999, he managed to retain the strength of the Pakistani rupee through policy and administrative measures which played a pivotal role in avoiding high levels of inflation.
The high current account deficit was widely criticized when the PML-N left office in 2018. However, a detailed analysis shows that the import of plant and machinery was the main contributing factor. Importing was directly linked to increased domestic economic activity and helped to stimulate growth and solve the chronic problem of load shedding in Pakistan.
It has been widely alleged that the exchange rate was “artificially managed” at a high level due to which exports remained stagnant during the period 2013-2018. However, export difficulties were mainly due to global market conditions. World Trade Organization publications show that the volume of world merchandise trade was steadily declining from 2013 to 2016 and only started to increase in 2017. Yet there was no significant growth until 2017 in terms of value.
The current situation will test Ishaq Dar’s skills. He has very little time to show his abilities and rebuild the lost economic momentum. Economists, traders and entrepreneurs have already sounded the alarm. Any delay in taking corrective action can be fatal both to the hopes of recovery and to the political capital of the PML-N.
Abdul Rauf Shakoori is a US-based corporate lawyer
Supreme Court Advocate and Writer Dr. Ikramul Haq is Adjunct Professor at Lahore University of Management Sciences (LUMS)