The row over the recent LDP cut on gasoline between Finance Minister Ishaq Dar and his predecessor Miftah Ismail reflects a deeper unease than a simple difference of opinion. It is a manifestation of the conflict within the PML-N and a reflection of the competing political narratives that are currently emerging in economic policy-making.
It is not without reason that Mr. Ismail publicly criticized Mr. Dar’s first major act in office, without prior IMF approval, as “reckless”. After all, his own attempts to avoid default were called into question and he was publicly undermined not only by Mr. Dar but also by Nawaz Sharif during his six-month stay.
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Maryam Nawaz not only disapproved of many of his actions, but also forced him to revoke trader taxes at the cost of a significant loss of revenue for the treasury.
Nor would Mr. Dar respond to him in an interview by saying, “Don’t we have a heart? Should we continue to burden 220 million people with taxes? Miftah need not worry. I know how to deal with the IMF.
Mr. Dar’s appointment is just one sign of the paradigm shift in economic policy-making.
While Mr. Ismail has done a commendable job of making tough decisions to revive the stalled IMF program, the government did not have long to improve its image with voters.
Mr Dar, who represents the Punjabi business community and small businesses as its leader, has apparently been brought back to revitalize his party’s political capital ahead of the next election. Known for his interventionist policies, he plans to achieve this by strengthening the exchange rate, as a weakening of the rupee always comes at a significant political cost to ruling parties in Pakistan.
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The recent appreciation in the value of the rupee without any change in economic fundamentals, and despite the destruction caused by the floods, indicates that the foreign exchange market has already begun to integrate its interventionist policies and to shed the speculative grease that he had accumulated late.
However, is this sustainable, given that Mr. Dar has limited opportunities and even fewer dollars to influence the exchange rate unlike the last time he held the portfolio? More importantly, will the IMF let him reverse the restrictive monetary and fiscal policies under its lending program that call for leaving the exchange rate to market forces, raising the interest rate, cut spending, cut subsidies and raise taxes?
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The statement by its resident representative in Islamabad that “the political commitments made by the government to resume the support program continue to apply” is already interpreted as the IMF’s disapproval of the reduction of the LDP.
The PML-N has made a risky bet: if Mr. Dar fails to stabilize the economy and reduce inflation, it will hurt the party’s electoral chances, and if he succeeds in creating an illusion of prosperity through market interventions and lax fiscal policies, this will be detrimental to long-term economic viability.
Posted in Dawn, October 5, 2022
