Dar: a solo flight no longer an option

The PML-N (Pakistan Muslim League-Nawaz) stalwart Ishaq Dar, after securing safe water for his return, landed at Nur Khan air base together with Prime Minister Shehbaz Sharif and took oath as a Senator before he took over as the Finance Minister of Pakistan, thereby creating a history of being the sixth holder of this sensitive office in less than four years amid persistent economic and political turbulence in the country.

Dr Miftah Ismail, who tendered his resignation, apparently was a stop-gap arrangement entrusted with a limited mandate pending the return of Dar - who presumably, from day one, called the shots from London and steered Ismail during the latter’s nearly 6-month stint as the Finance Minister.

What different Dar, who is now in the driving seat, will do is yet to be seen. Understandably, he held all the cards close to his chest and will now place them on the table one by one.

Ismail’s high point of his short stay as a minister is his claims of taking difficult decisions to help the country successfully avert sovereign default and adhere to the IMF (International Monetary Fund) preconditions, including rolling back power and fuel subsidies, which saw inflation rise above 27% and the rupee tumbling to a historical low.

The mantra of difficult decisions is a misnomer as the IMF check-mated the government with an option of a single and straight decision: “Sign the IMF agreement on the dotted line or walk out of it.” Walking out of IMF programme was not an option open to the government.

The markets then did not respond positively to IMF deal with the rupee declining to a record low while inflation sky-rocketing - while the Finance Minister and his ministry assumed a passive role and watched the effects of their decisions take hold.

The four immediate tasks before Dar are to restore stability of Rupee, tame inflation, secure pending bilateral and other loans from lenders and friends and above all restore the market confidence. Of the four, arresting the slide of rupee is comparatively the easiest one, whereas, roll back of inflation is complex and formidable and is the most difficult one and not likely to happen anytime soon.

Dar enjoys the reputation for his crafty skills through which he can maneuver the rupee-dollar parity and keeping one step ahead of speculators in the open market. The task this time is comparatively difficult as the dollar is globally strengthening against all currencies, notably, £ sterling and euro. But what the ‘Dar factor’ can well achieve is: “wipe out the speculative part from the dollar rise”.

Speaking to media persons at the Parliament House before taking oath, Dar said the value of rupee was artificially depreciated, which has turned out to be a major problem for Pakistan’s economy. “We landed here last night and the value of rupee against dollar has strengthened by 10 rupees,” he said, adding that “the overnight improvement in the value of rupee against dollar resulted in the reduction of Rs 1,350 billion in Pakistan’s total debt”.

A decrease of 10 rupees just on the news of Dar’s return underscores the level of speculation in the rise of dollar and this number could well be a fraction of real numbers.

As per standard practice, the Finance Ministry and State Bank of Pakistan invariably intervene to correct the induced distortion in the fall of rupee value. Intriguingly, both the said institutions opted not to intervene and passively witnessed the virtual free fall of the Rupee. They were either fearful of a reprimand by IMF or they decided to leave the correction decision and its credit to Ishaq Dar upon his foreseen return.

In the absence of further inflow of funds from lenders and lower exports, the foreign exchange reserves are depleting and becoming a red flag for the country’s economy. Pakistan’s foreign debt obligations have continued to spike; whereas Pakistan’s risk of default on foreign debt repayment continues to hover as a possibility.

Mobilising foreign currency inflows from multilateral and bilateral creditors and friendly countries and boosting the country’s foreign exchange reserves will be the third biggest challenge for the new Finance Minister. Fortunately, global commodity prices have started easing and may help the country cut its import bill.

The destruction wrought by recent floods and its widespread reporting by global media and world leaders has invoked the empathy of global lenders to help out Pakistan. As a starting point, the world has vowed its support to Pakistan to help it overcome the devastation caused by the floods; and the world community has pledged $1.5-2 billion in aid.

More of it can be managed out of bigger lenders like the World Bank, if right level of credibility of funds deployment could be truly established – an area where Pakistan lacks behind and does not enjoy an enviable track record.

Any rescheduling or flexibility from the IMF under its programme is unlikely to happen. In fact, the Fund is insisting upon Pakistan to approach China to reschedule its long-term commitments on CPEC (China Pakistan Economic Corridor) projects. This too is unlikely to happen.

The fourth biggest challenge is the domestic business and the foreign investor sentiment. Both, at this time, are at their lowest. The business transactions in the market are limited; these are only on need basis.

Around 50 percent of the industry is either closed or facing the slowdown due to high lending rates, unfeasible input costs and low consumer demand. The once vibrant real estate market and a barometer of flourishing economy and money transactions is virtually at a stand-still due to tax on land holding and FBR monitoring of sale/purchase transactions which the investors describe as ‘harassment’ or counter-productive. In the process, the government is losing on tax collection at both ends.

The plight of foreign investors is equally disappointing. Repatriation of profit and dividend by foreign investors fell sharply, i.e. 93 percent during the first two months of this fiscal year (FY23) due to economic slowdown.

Further, the FDI inflows in July - August declined by 27 percent year-on-year, highlighting the loss of foreign investor sentiment. Analysts argue that the massive decline in repatriation of profit and dividend reflects that foreign investors’ earnings have been down drastically during the last fiscal year.

The challenges posed to Ishaq Dar this time are for real and extend far beyond juggling numbers and accounting excellence. The need of the day is economic wisdom and excellence, skilled economic diplomacy and high level of strategic planning.

The minister this time needs to have a team of highly skilled and independent professionals around him to steer the country out of an unprecedented economic crisis. A solo flight is no longer an option.

Copyright Business Recorder, 2022