Can Dar collar inflation and dollar?
The writer has served as Chief Secretary, K-P. He has an MA Hons from Oxford University and is the author of two books of English poetry 'The Dragonfly & Other Poems' and 'Bibi Mubarika and Babur’
Dar has a Sisyphian task. After Miftah’s commendable, though not too widely appreciated achievement, avoiding an imminent default and possible meltdown (images of shortages, long lines of buyers of essential goods, social unrest and violence from several countries with such experiences are not forgettable), he enters the Q block at a critical time. The economy is lurching amid a serious reserve problem, a sinking rupee, soaring Inflation and depressed growth compounded by historic floods.
The FM’s primary focus would thus be controlling inflation, restoring the rupee value, reducing the interest rate without stoking price hike, reviving growth, and recovery from the flood devastation. Any political party will be keen to improve its economic baggage going into an election nine months hence. Dar’s critics point to his keeping an overvalued rupee during his previous stints draining foreign reserves and leaving a legacy of an external crisis. He can contrarily claim achieving by 2018 a GDP of 5.8%, keeping inflation at 3.4% and the dollar around Rs125.
Five parameters should determine possible moving space available to the new FM: the endemic economic structural bottlenecks is a perennial issue. The IMF package improves our international credit worthiness while tying a millstone of harsh conditionalities around our neck. The devastating floods will reduce growth and fuel inflation while improved external relations should open up avenues of debt relief and foreign help for flood rehabilitation. Economic uncertainty due to political instability will remain a challenge.
The new FM faces daunting tasks as well as opportunities: besides prices being downward sticky (once prices increase there is no tendency to fall), there may be scope, due to flood losses, for some relief from IMF, although renegotiation may be out of court. Although curbs on speculative dealings, LC manipulations by banks and disallowing exporters from holding back on proceeds will be addressed, the more serious peril will be the projected worldwide recession with continued upward spiral of the dollar.
Confronted with goals of growth and social welfare, democracies are intrinsically averse to inflation which amounts to disproportionately taxing the poor and middle classes that also largely constitute the electorate. Thus maintaining a stable local currency and not allowing the dollar to rise too sharply remains a constant while the IMF pulls in the opposite direction of free market dictates. This is particularly true in case of countries like Pakistan whose energy imports constitute nearly 36% of all its imports, with oil prices having a very large impact on inflation.
Our endemic structural problems are well known: a large savings gap entailing foreign indebtedness, untaxed agricultural incomes, inability to implement serious egalitarian land reforms, the triad stranglehold of patronage, elitism and privilege that distorts power distribution, an unsustainably inefficient energy system resulting in massive debt circularity, an exemption and SRO-led regime, loss-making SOEs, poor investment climate and ease to do business, adverse security situation and political instability, lack of a strong legal environment providing safeguards to foreign and domestic investments.
Although political instability during civilian rule is blamed for inability to resolve these chronic issues, even during the long tenures of military rule of Ayub, Zia and Musharraf these issues stood unresolved. As such we repeatedly experience a boom and bust cycle of growth followed by a foreign exchange crisis.
Due to inability to seriously increase our exports — amid a 5 to 6 % GDP growth rate — the external account deficit becomes adverse. A sustained high growth path that China and East Asian economies achieved during the 1960s and now by India post-1980s has eluded us. Due to the abovementioned structural issues which nearly every government has tried to evade solving due to over-concern with questions of political stability and legitimacy, Pakistan has been forced to seek redress in the shape of IMF bailouts after every three to five years.
Since 1947 Pakistan has sought IMF loan programmes 23 times, and of them 10 have been Extended Financing Facilities and 13 Standby Arrangements.
One of the constant conditions of IMF loans has been the free floating of currencies although this doesn’t always translate into increased exports nor are free market mechanisms often the best answer to optimum resource allocation and utilisation in undeveloped economies. A free float in such situations can result in sharp inflation adversely impacting the common consumer and increasing inequality.
In the past during the Ayub, Zia and Musharraf periods, being staunch US allies, we could evade strict IMF conditionalities. Due to strained relations with the US, under the 2019 IMF agreement, besides other harsh conditionalities, we accepted a free float of the rupee which, given the dire forex situation, led to its precipitous fall against the dollar leading to soaring inflation. As a concomitant interest rates were increased from 7 to 13 % dampening growth.
Nearly every country maintains some form of direct or indirect control over the value of their currencies. China is the best example. The Japanese State Bank intervened with offloading $26 billion during last week of September to stem the falling yen while the Bank of England resorted to purchasing bonds from the market to prop up the pound. India keeps a close watch over its currency. During the East Asian financial crisis of 1997, governments infused large sums of dollars into the markets to prop up their currencies.
Pakistan has been unable to appreciably increase its domestic saving rate above 10-14% of GDP as compared to levels of 18-25% in India and Bangladesh and above 30% in the case of China. Agriculture sector pays negligible taxes since every government and assembly is hostage to rich feudal landlords and elite. No attempt at equitable redistribution of land holdings has occurred. Landlordism translates into economic privilege and political power.
Due to the large domestic saving gap recourse is necessary to external assistance. This increases debt liability forcing resort to foreign assistance. Resort to IMF, though it helps countries in improving their credit ratings in seeking assistance from non-IMF donors, often results in bitter conditionalities with harsh social implications.
It is well to keep these considerations in background to appreciate the forbidding task that lies ahead of Ishaq Dar. Are these challenges best viewed as those pertaining to one party or to one Finance Minister or ones that the country as a whole confronts?
Published in The Express Tribune, October 4th, 2022.
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