Pakistani politics have always been in the news since the country came into existence. Pakistan has seen many political characters that have created a significant amount of impact in Pakistan, be it negative or positive. Ishaq Dar, the ex-finance minister is one of those personalities who has always been in the news for his actions, whether it’s about laundering money, economic decisions, making properties in Dubai, or getting grilled on Hard talk. Ishaq Dar, who is well known for favoring a stronger currency, will be taking over as finance minister, and analysts predicted that the incoming finance minister would have to focus on improving foreign reserves, reducing inflation and stabilizing the rupee. Ishaq Dar’s return to Pakistan and his takeover of the Finance Ministry caused the rupee to rise against the dollar.
This indicated the markets’ recognition that Mr Dar’s main claim to fame was the defense of rupee, and that he would take steps to bring it down. However, the rupee started rising. Now, it seems the honeymoon is over, and the rupee has started falling again. One prediction is that it will go to 250 to the dollar, which would be a historic low. This cannot be reconciled to Mr Dar’s statement that a fair value is around 190-200.
However, the market seems to have started rebounding from Rs 220, which indicates that Mr Dar’s analysis is incorrect. Mr Dar has perhaps over-estimated the effect of exchange rate on inflation, the real problem he was sent to tackle, while exchange rate leaves the average voter cold, inflation determines how voters will choose. Imported inflation cannot be ruled out entirely, but it certainly is not as great a cause as Mr Dar assumes. It seems to have led him to miss the full impact of the recent floods. While getting off the FATF grey list is good news, it should not lead Mr Dar to avoid the inevitable conclusion that the fundamentals of the economy remain unsound.
The ‘Triple-C’ crisis (Covid-19, conflict, and climate change) is giving sleepless nights to finance ministers worldwide. Take Covid-19 first; the global economy shrank by around 4.3 % in 2020, a setback matched only by the great depression and the two world wars. In 2021, before the start of the Russia-Ukraine war, the World Bank forecasted global GDP growth for 2022 to remain slow (4.4 % below its pre-pandemic predictions) due to the impacts of Covid-19.
The Ukraine conflict started in February 2022. One of the casualties of this conflict is the supplies of cereals, energy, fertilizers, and other raw material; supplies from Russia became non-kosher due to Western sanctions, whereas supplies from Ukraine are inaccessible. Petroleum importing countries like Pakistan are facing the maximum brunt of this inflation due to the high cost of imported energy. The deteriorating balance of payments is one of the reasons the Pak rupee is losing its value against the US dollar. Slow economic growth coinciding with the rising inflation is known as stagflation in economics. Pakistan is braving climate change (devastating floods) amidst this global stagflation. The longish intro above explains Ishaq Dar’s challenges as the incumbent finance minister of Pakistan.
Mr Dar’s main political task is to rein inflation, and that he probably plans to do by raising the value of the rupee. That they are liquidating their positions indicates that they expect him to repeat what he had done in his last stint as Finance Minister, which was to borrow dollars from the market and use them to push up the price of rupee by creating sufficient liquidity in the market. He can’t do it now; the IMF won’t let him. The forex reserves are at the moment too low to allow such a policy, so he will have to let the rupee find its true value.
is, is subject to a number of factors, to do both with foreign trade and domestic policy, but it is not known what, if any, figure of a fair value Mr Dar carried in his head. Even if that figure is reached, Mr Dar will still have to face the morning after, when the rupee begins to slide again. “Dar optimism helped exporters to sell the greenback in the market, leading to the rise in rupee,” said a dealer. “The dollar is crushing global currencies, while our foreign exchange reserve position is far from comfortable. Thus, any sustainable rally in rupee does not seem likely in current scenario.
The situation in global and Pakistan’s economy is not isolated, thus change of finance ministers would not do any magic. The expectations of dollar inflows from international lending institutions to support Pakistan’s relief and reconstruction efforts in the wake of the catastrophic floods that have hit the country and the decline oil prices also helped to prevent the rupee from hitting a record low during the last week.
The minister is most famous for strong-arming the central bank to liberally inject foreign exchange into the market to prop up the rupee. “He would like to see lower interest rates and a stronger rupee,” Nazar said. But he added the current global environment and the running IMF program would not allow Dar to pursue his signature policies. Pakistan’s foreign reserves currently stand at a level that covers just over a month of imports – which makes intervention difficult. In addition, under the ongoing IMF program, Pakistan has agreed to a market-based currency exchange regime and earlier this year passed a law that gave the central bank more autonomy and insulated it from government pressure. Dar’s predecessor, Miftah Ismail, was a proponent of following a painful IMF stabilization program, which included removing fuel and power subsidies, despite the political cost with inflation rising above 27% year-on-year and the rupee tumbling to historical lows.
Recently, however, the government said the IMF has indicated it would soften program conditions because of the devastating floods that are estimated to have caused around $30 billion in losses and will slow growth this year to below 3% from an earlier estimate of 5%. Mr. Dar’s main challenge is to stabilize the exchange rate in order to put the genie of massive inflation back in the bottle. Along with the four major challenges for him are to contain inflation, stabilize the value of rupee, regain the trust of multilateral lenders, and mobilize funds for flood recovery. Energy and food inflation are the major contributors to the current price hike in Pakistan. Bringing fuel inflation down depends on petroleum prices in the international market. Low import prices provide a higher cushion to the finance minister to increase the petroleum development levy – PDL – (as per our commitment with the IMF) without further hurting consumers.
