An economic slide

Ever since the Pakistan Democratic Movement (PDM) came to power, the good governance myth of the top team of senior partner in the ruling coalition, Pakistan Muslim League-Nawaz (PML-N) is unraveling. First, the myth of ‘Shehbaz super speed’ is broken, and now it’s the turn of the PML-N financial czar, Ishaq Dar. Back in September, Dar landed with tall claims, yet there has been no improvement in the economic fundamentals or sentiments.

The risk of default is growing. Negotiations with IMF over the upcoming review are at a standstill. No firm commitments for investments have been made by friendly countries. Whatever could have gone wrong, has gone wrong.

Dar’s entry was full of confidence. But he has nothing concrete to show. That was bound to happen. Nobody can be lucky thrice. The problem is in his approach. And that is unraveling. Dar doesn’t believe in the market economy. He is not a proponent of reforms. He believes in controlling the economy – whether it is exchange rate, interest rates or taxes. His theories are being exposed. He started by claiming that he would renegotiate with the IMF (International Monetary Fund); but came back empty handed from Washington. He talked about giving a befitting response to the rating agencies for downgrading Pakistan’s credit rating; but the markets responded by pricing in higher risk of default.

Dar was extremely lucky between 2013-16. Back then, oil prices crashed soon after he assumed the role as finance minister. He received the IMF programme when the current account was manageable. The country was on the right side of the western establishment. Friends in the Middle East were still generous. Space for reforms was created; but that was instead squandered to demonstrate a short growth stint. Circumstances were bound to reverse, and ironically, it’s all culminating with Dar now back at the helm.

The populist demand from Dar was to bring stability to the currency and he was very vocal that he would bring the PKR/USD below 200 mark. So far, he hasn’t been able to do so. Even the parity at current levels is due to controls. There are three rates in the market. Interbank is around 220. Exchange companies’ rate is around 230. And the open market buying is around 240. The reserves are falling and there is no confidence in the market.

On currency, his argument is based on the REER value, and he has been saying that based on the prevailing REER of 91 the currency has room to appreciate. However, in his last tenure, the REER went up to 127 and at that time he used to ridicule those who were using REER argument for currency depreciation. He was managing rate back then and is attempting to do so again now.

He is mostly talking about the exchange rate and interest rate. Strictly speaking, neither is his domain as finance minister. His core job is to manage the fiscal side. And slippages over there are the root cause of all other problems. External balance is the reflection of the fiscal side. And the situation is that the fiscal house is out of order. The deficit in the first quarter of 2022-23 is high. It’s a reminiscent of first quarter of 2018-19.

At that time, criticism was over the newly formed PTI (Pakistan Tehreek-e-Insaf) government and its finance minister Asad Umar. Government and its ministers’ performance is judged on the basis of the circumstances in which they operate. People usually do not give weight to what led to those circumstances. Time was with Dar during his last term, and he appears to have run out of it this time.

It seems that Dar has the realisation that economy is not in his control, and his methods have little or no efficacy. The recent political developments suggest so. The next few months are going to be tougher. The argument for the government to stay long enough to rescue the economy out of tailspin to regain lost political capital is tricky.

The argument was offered by PDM in May 2022. And by Nov 2022, the situation is no better. And the picture looks bleaker going forward.

This winter is going to be very tough. A terrifying gas crisis is in the offing. Economic growth is tanking. SBP’s policy of controlling imports through restricted LCs issuance is yielding in terms of controlling the current account deficit. However, the cost is low growth, lower tax collection and higher unemployment.

This is not helping in managing the fiscal deficit. The IMF is asking for more fiscal measures which will inevitably result in a fresh round of taxation. There is a case of even higher levies on petroleum. Sooner or later gas prices would be revised upward as well. The development expenditure must be curtailed further. All these are likely to worsen PML-N’s and Dar’s popularity graph.

Then there is the problem of financing the external account gap. IMF wants the foreign exchange reserves at higher levels. But the inflows have dried up. The IMF review is stuck. And without IMF’s nod, World Bank money is stuck too. The grapevine is that there is nothing coming in the form of investment from Qatar or the UAE. Situation is unclear on the commitments from Saudi Arabia and the response from China on debt restructuring is also uncertain.

The bottom line is that Dar’s bets are not working out for him anymore. The situation demands some stability on the political front for friends and markets to have any confidence in Pakistan’s economic revival. Tougher decisions are required for the IMF review. The need is to do different. Either Dar should move from controlled economy formula to reform-based or leave the job for someone else to do what’s necessary to help improve economy.

Copyright Business Recorder, 2022