Mr. Ismail wasn’t wrong when he called Mr. Dar’s first major act in office, without prior IMF approval, “reckless.” After all, his own efforts to avoid default were questioned, and he was publicly undermined not only by Mr. Dar but also by Nawaz Sharif during his six-month tenure. Maryam Nawaz not only disagreed with many of his actions but also forced him to repeal trade taxes, resulting in a significant loss of revenue for the government.
The squabble between Finance Minister Ishaq Dar and his predecessor, Miftah Ismail, over the recent decrease in PDL on petrol reflects a deeper malaise than a difference of opinion. It reflects the conflict within the PML-N as well as the competing political narratives that are now emerging in economic policymaking. Mr. Ismail wasn’t wrong when he called Mr. Dar’s first major act in office, without prior IMF approval, “reckless.” After all, his own efforts to avoid default were questioned, and he was publicly undermined not only by Mr. Dar but also by Nawaz Sharif during his six-month tenure.
Maryam Nawaz not only disagreed with many of his actions but also forced him to repeal trade taxes, resulting in a significant loss of revenue for the government. Mr. Dar would not have responded to him in an interview by saying, “Don’t we have a heart? Must we continue to tax 220 million people? Miftah should not be concerned. ” I understand how to deal with the IMF.” Mr. Dar’s appointment is merely symptomatic of a paradigm shift in economic policymaking.
While Mr. Ismail did an admirable job of reviving the stalled IMF program, the government does not have much time to improve its image among voters. Mr. Dar, who, like his leader, represents the Punjabi trading community and small businesses, has reportedly been brought back to re-energize his party’s political capital ahead of the next elections. He plans to accomplish this by strengthening the exchange rate, as a weakening rupee always comes at a high political cost to Pakistan’s ruling parties.
The recent rise in the value of the rupee, despite no change in economic fundamentals and despite the devastation caused by the floods, suggests that the foreign exchange market has already begun to price in its interventionist policies and has begun to shed the speculative fat it had accumulated recently. Is it, however, sustainable, given that Mr. Dar has fewer avenues and even fewer dollars to influence the exchange rate compared to the last time he held the portfolio? More importantly, will the IMF allow him to deviate from the loan program’s contractionary monetary and fiscal policies, which include leaving the exchange rate to market forces, raising interest rates, cutting spending, eliminating subsidies, and increasing taxes?
The Fund’s resident representative in Islamabad’s statement that “policy commitments made by the government to resume the support program continue to apply” is already being interpreted as a rejection of the PDL squeeze. The PML-N has made a risky bet: if Mr. Dar fails to stabilize the economy and reduce inflation, it will harm the party’s electoral chances; if he succeeds in creating an illusion of prosperity through market interventions and loose fiscal policies, it will be detrimental to long-term sustainable management.