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Dr. Ikramul Haq & Abdul Rauf Shakoori
The Word Banks’ recent publication, World Bank Regional Economic Updates – October 2022 has noted that countries in South Asia are already coping with high commodity prices, supply bottlenecks, and vulnerabilities in financial sectors. The geopolitical situation due to the war in Ukraine is amplifying these challenges, adding to inflation, increasing fiscal deficits, and deteriorating current account balances. The current situation warrants that governments need to carefully plan monetary and fiscal policies to counter external shocks and protect vulnerable classes. Simultaneously, the war and its impact on fuel prices offer the region the much-needed stimulus to reduce reliance on fuel imports and transition to alternate, green, and cheap energy resources.
Against the backdrop of this challenging global economic situation, a change of command took place when Miftah Ismail resigned, and Muhammad Ishaq Dar took office as Federal Minister of Finance for Pakistan for the fourth time. Ishaq Dar has been the “in-house” economic wizard of the Pakistan Muslim League (Nawaz)—PMLN—for decades. Whenever PMLN had an opportunity to govern, Ishaq Dar has been their obvious choice.
The reins of economy were handed over by Pakistan Tehreek-e-Insaf (PTI) to the coalition government of Pakistan Democratic Movement (PDM) in April earlier this year. The succeeding government was caught between the devil and the deep sea where the economy was fast heading towards an external default, especially when talks with the International Monetary Fund (IMF) for resumption of the Extended Funded Facility (EFF) failed. With very limited options left on the table, Miftah Ismail, former Finance Minister took a bold step to roll back the unsustainable fuel and energy subsidies announced by PTI government in the last days before being removed by the office through a constitutionally backed no-confidence motion.
The economic landmines laid down by PTI were removed by PDM government which, in the process negatively impacted their political capital. It remains an undisputed fact that Miftah Ismail averted the risk of default and was successful in resuming IMF’s EFF for Pakistan. However, the policy measures undertaken in the process eroded the purchasing power of the common man. Pak rupee witnessed the worst spells of devaluation where within a few months it lost more than 30% of its value against the American dollar, inflation numbers skyrocketed and Consumer Price Index (CPI) inflation for July to August period was recorded at 26.1% as against 8.4% in the corresponding period of 2021.
The government undertook multiple steps to manage the exchange reserve challenges and due to these factors, the Current Account posted a deficit of US$ 1.9 billion for July-August of the fiscal year (FY) 2023 as compared to a deficit of US$ 2.4 billion in the corresponding period last year.
Further, the increase in exports also contributed positively to curtailing deficit which witnessed a growth of 11.3% during Jul-Aug FY 23 and reached US$ 5.1 billion. Resultantly, trade deficit for Jul-Aug FY23 recorded US$ 6.0 billion as against US$ 6.8 billion last year.
Challenges like floods, inflation, and import restrictions have made the overall business environment extremely difficult and pulled down the large-scale manufacturing index to negative growth of 1.4% in July FY 2023 against 4.4% growth in the corresponding period last year. It is pertinent to mention that despite the floods and import restrictions, Federal Board of Revenue has been able to surpass the assigned target by 22.5 billion during Jul-Aug FY 2023 and net revenue collection (provisional) grew by 9.7% to reach Rs. 948.1 billion against Rs. 864.5 billion in the same period last year.
The immediate issue in hand for the new Finance Minister, Ishaq Dar, is to steer the country out of stagflation. If this situation persists it will most likely trigger business closures leading to high unemployment and lower revenues, both domestic and export-based. Businesses are in dire need of breathing space where inflation and interest rates are tamed down to reasonable levels and exchange rate adversities are managed so that they can undertake cost-effective activities. Though Pakistan has avoided the immediate risk of default, but the risk is far from over, with the expected global recession and slowdown of local economy, maintaining exports and foreign direct investment (FDI) numbers at a reasonable level to keep the current account balance at a desirable level; will be uphill tasks.
Further, with strict conditions imposed by IMF, Pakistan has very limited fiscal and administrative space left to exercise its discretion. From frequent fuel price adjustments, tariff revisions, imposition of taxes, and free-floating of currency to policy measures of the State Bank of Pakistan (SBP), almost all macro-economic actions are subject to IMF’s approval.
Ishaq Dar is known for maintaining equilibrium between lenders’ targets and protecting socio-economic interests of citizens. He is the only finance minister of Pakistan who has completed the IMF’s programme and that too with historic low inflation and policy rates and a high GDP growth coupled with positive FDI numbers. During his most recent tenure in 2013-2017 and even previously in 1997-1999, he successfully retained the strength of Pak rupee through policy and administrative measures which played a pivotal role in avoiding high inflation levels. Criticism was afloat about high current account deficit levels when PMLN left office in 2018. However, a detailed analysis shows that import of plant and machinery was the key contributing factor that was directly linked with increased economic activity at the domestic level helping to boost growth and address the chronic problem of load shedding in Pakistan.
Similarly, it is widely criticized that the Pak rupee was “artificially managed” due to which exports remained stagnant during 2013-2018. However, these export-related challenges were primarily due to global market conditions. The publications of World Trade Organizations provide details that global merchandise trade volume was on a constant decline from 2013 to 2016 before it started rising in 2017. The number shows that there was no significant growth till 2017 in terms of value.
The current mind-baffling situation will surely test Ishaq Dar’s skillsets, who has a very limited time to showcase his abilities and rebuild the lost economic momentum. Economic experts, traders, and business entrepreneurs have been repeatedly ringing alarm bells and any delay in taking corrective measures can destroy hopes both for recovery and PMLN’s political capital simultaneously.
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Dr. Ikramul Haq, Advocate Supreme Court, and writer are an Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE).
Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance. They have recently coauthored a book, Pakistan Tackling FATF: Challenges and Solutions with Huzaima Bukhari.