A Saviour or Nemesis?

Many see the finance minister as habitually focused on controlling exchange rate, thus causing the economy to dip

Karachi: This is the fourth time Ishaq Dar is heading the Finance Ministry. And many believe that every time he held this post, he primarily focused on controlling the exchange rate, which always proved counterproductive, adding to the suffering of the country and its people.

During 2013-17, he single-mindedly defended the rupee in the currency market in nominal terms, presiding over an inflation-adjusted 26 per cent appreciation of the currency.

This created the most predictable of consequences. As imports became cheaper, importers, industrialists using imported raw materials to cater to the domestic markets, and the consumers went on a spending spree. But exporters lost their competitiveness, and exports as a percentage of gross domestic product (GDP) fell to more than 30 per cent.

Thus, Dar left a clear legacy of choosing winners and losers in this game. He created short-term stability and a consumption boom at the expense of long-term liabilities and a loss of industrial and export productivity.

He started his political career in early 1980s, and has since been elected to the National Assembly twice from Lahore, and to the Senate four times from Punjab.

Now a close relative of Nawaz Sharif, he has been an integral part of the successive Pakistan Muslim League-Nawaz (PML-N) governments which are known for projects such as the infamous Yellow Cab scheme which was marred with corruption allegations, the motorways, expensive energy deals and excessive taxation and amnesty schemes.

When the PML-N formed the government in June 2013, Dar became the federal finance minister for the third time, and was given the additional cabinet portfolios of revenue, economic affairs, statistics and privatisation.

In July 2017, the Supreme Court disqualified him from holding the office of the finance minister. This came soon after then prime minister, Nawaz Sharif, was also disqualified by the same court in the famous Panama Papers case.

Sub-legacies of Dar suggest recklessness in policies, with a few precedents from the recent past. First, a widely dilapidated tax collection machinery in need of a comprehensive overhaul received little push towards long overdue reforms. In a country with a low tax filers’ base, the message is clear, that the state can do little to force tax evaders to pay their dues.

Second, Pakistan’s almost decade-long energy crisis may have recently shown some signs of improvement, given that the widely despised hours of power outages are beginning to be trimmed. However, it is too early to tell if this is a genuine improvement or an engineered move to influence voters ahead of the elections.

He has been publicly taking credit for restoring confidence in Pakistan’s economy. However, he has been accused of using the Statistics Division, mainly the Pakistan Bureau of Statistics, to manipulate figures so as to create a positive image. Earlier in 2014/15 and again in 2015/16, several economists had questioned the economic growth figures touted by his ministry.

He is also remembered for accumulating huge external debt which under his watch increased from roughly $ 61 billion in June 2013 to $ 83 billion in June 2017. He preferred short-term measures to prop up the official foreign exchange reserves over painful long-term steps to enhance the reserves through non-debt-creating instruments.

During his first four years as the finance minister, Dar obtained $ 35 billion worth of gross external loans, and yet opposed all attempts to devalue the rupee. He used those foreign currency reserves to sustain the ongoing rupee-dollar exchange rate.

According to analysts, Dar had been fortunate then to preside over the country’s finances at a time of favourable external conditions. Crude oil was especially cheap in the international market during 2014-17, priced at less than half the rates witnessed earlier this year.

These lower prices, combined with a lower debt burden, meant that Dar was able to loosen the government’s purse strings to catalyse growth and lower the inflation rate in the short-term.

This move was widely panned by the economists at the time, who warned about the vulnerabilities that Dar’s unsustainable policies were creating.

Instead of undertaking the long overdue tax reforms, Dar resorted to increasing indirect taxes such as withholding tax, customs duty and general sales tax. In the meantime, he over-relied on borrowings to allow the then ruling PML-N to finance projects of questionable value, such as a large and underused Islamabad Airport that cost around $ 1 billion.

The opposition party, Pakistan Tehreek-e-Insaf (PTI), claims that Dar wasted $ 32 billion in 2016/17 just to keep the exchange rate at Rs 105 to a dollar. He did this ahead of the 2018 elections.

Now, there is a looming shortage of essential goods, including food, raw materials, industrial materials and even essential medicines, besides a record-high inflation. Even the sitting defence minister, Khwaja Asif of PML-N, has admitted that Pakistan has already defaulted.

The country’s economy is in dire straits. It is stricken by a balance of payments crisis amid political chaos and deteriorating security. Inflation has skyrocketed, the rupee has plummeted and the country can no longer afford imports, causing a severe decline in the import-dependent industry.

The critical position of the foreign exchange reserves, which stood at around $ 3.19 billion as of 10 February 2023, reflects the miseries of a $ 350 billion economy which is struggling to fund imports. Thousands of containers carrying industrial supplies remain stranded at its ports, stalling production and putting jobs of millions of people at risk.

Pakistan has experienced over 27 per cent inflation this year so far, the consequence of the country’s persistent refusal to deal with its fiscal or trade deficits, made worse by the extreme fiscal imprudence and political instability.

When he took charge of the finance ministry for the fourth time last year, his first statement was that the Pakistani rupee was undervalued. He vowed to reduce interest rates, fight inflation and strengthen the exchange rate.

What is actually happening on the ground is there for everybody to see.