SBP’s (State Bank of Pakistan’s) surprise 100 basis point increase in its key policy rate (to a 24-year high of 16pc) effectively spells the end of the Darnomics experiment as the fanfare surrounding Ishaq Dar’s controversial return to the finance ministry did not result in “renegotiating the IMF (International Monetary Fund) program” or “giving a fitting reply to ratings agencies”; instead PML-N’s (Pakistan Muslims League-Nawaz’s) so-called finance czar has had to reluctantly let go of his influence over the monetary sector.
Clearly, SBP has been allowed to do what it can to keep “elevated inflation” from becoming “entrenched” because the finance minister ran into a brick wall in his meetings with the IMF and World Bank in Washington and could do nothing as Fitch and Moody’s dumped Pakistan’s credit rating.
And now, with the EFF (Extended Fund Facility) stalled once again, and no way of getting about $25-30 billion worth of debt rolled over till it is revived, and half the fiscal year already over, he has no choice but to roll back all his smart subsidies and agree to all the Fund’s strict conditions (which include an independent and hawkish SBP right now). Expect a mini-budget soon enough. But none of this is surprising.
What is surprising, though, is that Dar didn’t expect this to happen. Could be that he didn’t have the luxury of a news feed in intensive care, or he would have seen that Shaukat Tarin went on the same road before hitting the same wall and coming out with a similar mini budget just last year.
Only difference is that he was out of office before the structural adjustment began to bite really hard and conveniently blamed it all on the present government. In fact, he went to the extent of rolling out a blatantly expansionary budget in the thick of a crucial bailout program with “up front” conditions, winning PR points for PTI (Pakistan Tehreek e Insaf) at the cost of freezing the EFF and, with it, all bi- and multilateral aid.
All this only goes to show that at this point it does not really matter who the finance minister is or what qualification(s) he boasts, because the most crucial elements of fiscal policy are hostage to the bailout programme. Every time any finance minister has tried to divert from the fine print during the EFF, he’s had to ultimately cave into yet stricter conditions.
Hafeez Sheikh realised this not long after he replaced an embarrassed Asad Umar, and eventually lost his job for tightening the screws on fiscal policy while Reza Baqir did his bit to contract money supply.
Shaukat Tarin gambled with violating agreed upon terms – like the old days – by sprinkling industry and businesses with subsidies and tax breaks, and was put in place soon enough, with just about everybody worse off for it. Miftah Ismail leveraged the floods to push just far enough and rescued the IMF programme. It’s a shame that his own party made him the fall guy when he should be appreciated for saving the country from a very real threat of default.
Then came Dar, in a special plane and on the orders of Nawaz Sharif himself, to usher in his trademark mixture of a strong rupee and soft interest rates to stimulate import-dependent industry. Even financial markets cheered, not realising the contradiction in a strong currency and weak interest rates within the same policy mix. And we’ve quickly come to the point that his special incentives to select sectors, his claims of a rupee below 200 to the dollar and especially his obsession with remote controlling the monetary sector are fizzling out. He must, and most definitely will, return to IMF’s conditions, which means he wasted time and resources making promises and extending subsidies with nothing at all to show for it.
Whoever heads the finance ministry for the foreseeable future will have no option but to implement very harsh, very contractionary policies. It does not matter if it is Ishaq Dar or Shaukat Tarin, or anybody else from any other party for that matter, that is finance minister. It will only work if he does exactly as he’s told, which is necessary to keep the aid money flowing and the economy afloat.
A well-trained monkey could do it better than a smart economist (or accountant, banker, etc.); which tells a lot about the state of the economy and indeed the country.
Copyright Business Recorder, 2022