Mr Dar and the Triple-C challenge

The ‘Triple-C’ crisis (Covid-19, conflict, and climate change) is giving sleepless nights to finance ministers worldwide. Let me explain why:

Take Covid-19 first; the global economy shrank by around 4.3 per cent in 2020, a setback matched only by the great depression and the two world wars. In 2021, before the start of the Russia-Ukraine war, the World Bank forecasted global GDP growth for 2022 to remain slow (4.4 per cent below its pre-pandemic predictions) due to the impacts of Covid-19.

The Ukraine conflict started in February 2022. One of the casualties of this conflict is the supplies of cereals, energy, fertilizers, and other raw material; supplies from Russia became non-kosher due to Western sanctions, whereas supplies from Ukraine are inaccessible. Reduced supplies (especially energy) have increased global inflation by 2.9 per cent so far and are expected to increase global inflation by another 2 per cent next year. Petroleum importing countries like Pakistan are facing the maximum brunt of this inflation due to the high cost of imported energy. The deteriorating balance of payments is one of the reasons the Pak rupee is losing its value against the US dollar.

Slow economic growth coinciding with the rising inflation is known as stagflation in economics. Pakistan is braving climate change (devastating floods) amidst this global stagflation.

The longish intro above explains Ishaq Dar’s challenges as the incumbent finance minister of Pakistan. The four major challenges for him are to contain inflation, stabilize the value of the rupee, regain the trust of multilateral lenders, and mobilize funds for flood recovery.

Energy and food inflation are the major contributors to the current price hike in Pakistan. Bringing fuel inflation down depends on petroleum prices in the international market. Low import prices provide a higher cushion to the finance minister to increase the petroleum development levy – PDL – (as per our commitment with the IMF) without further hurting consumers.

As I write this piece, international petroleum prices are ticking south. Prices of ‘Arab Extra Light’ are down from $102 a barrel to $89 a barrel in the last three weeks. If this trend sustains, Mr Dar would have ample cushion to reduce the domestic retail prices of petrol and diesel while increasing the PDL. If the prices of the crude increase due to any escalation in the Ukraine conflict, then he would have no room to give relief on energy prices.

On the food prices front, he would not be able to contain wheat and wheat flour prices (wwfp) in the short-to-medium term. Wwfp would continue to increase in the coming winter, and this has nothing to do with standing flood water on cultivable lands. The latter would negatively affect wheat sowing for the next season and may result in a wheat shortage next summer (2023). The current wwfp hike has its roots in the tug of war to rule Punjab.

The Punjab Food Department, which historically used to provide subsidized wheat to the flour mills in September, started its releases in May, right after the wheat procurement drive when the private sector (including flour mills) had sufficient stock. Now with a significant part of the Sindh Food Department’s wheat inundated due to floods and the Punjab Food Department’s supplies running short due to earlier than planned releases, the private sector is selling its wheat at exorbitant prices resulting in wwfp hike. Crackdown on wheat hoarders in a province is beyond the federal government’s mandate, where Ishaq Dar has none or minimum say.

The best bet for Mr Dar here would be to increase allocations for social safety nets, link BISP payments with the Sensitive Price Index so that quarterly stipends don’t erode with inflation, and bring those earning up to Rs50,000 per month under the BISP coverage. Likewise, Mr Dar should also assess the effectiveness of utility stores and schemes like ‘sasta bazaars’ etc. The wastage of resources through pilferage from Utility Stores/sasta bazaars outweighs their benefits.

The second challenge for Mr Dar is to strengthen the value of the rupee against the dollar. The rupee had been under pressure mainly due to more demand for dollars than their supply, but also due to speculative buying of dollars by manipulators, panic buying by the general public, and irresponsible behavior (profit hunger) of some commercial banks and foreign exchange (forex) dealers.

Artificially strengthening the value of the rupee has major disadvantages. However, in the good old days, with sufficient reserves, the State Bank of Pakistan (SBP) could sell its dollars to commercial banks to keep their supply stable and artificially strengthen the rupee value. With less than a few weeks’ forex reserves (and due to IMF watch), the SBP is no more (and will no more) able to do the same.

SBP reserves come from export earnings, foreign direct investment, remittances, and external loans. In his brief stint, Mr Dar will be unable to ‘significantly’ improve SBP forex reserves. The best he can do is to manage the market sentiments by ensuring that the value of the rupee remains stable (and in a predictable range) by taming the forex association and the bank presidents. Stability in the rupee value would automatically curb speculative and panic buying of dollars and a resultant market correction where the currently undervalued rupee would gain some strength.

In regaining the trust of the multilateral lenders, Mr Dar has an inherent advantage. Unlike Miftah Ismail, who had to face criticism within the cabinet and from the party leadership for his policies and actions, Ishaq Dar’s opinion would prevail due to his persona in the cabinet and stature in the party. The slim chances that the cabinet/party would challenge his commitments with the IMF and other lenders would help him regain the IMF’s trust. How quickly he gets along with the IMF and whether he would be able to get some relaxation in the pace and sequence of the IMF programme would be a litmus test of his abilities to deal with multilaterals.

The last challenge Ishaq Dar faces is the mobilization of funds for flood recovery. Ideally, we should get compensated for the loss and damage caused by the devastating floods. However, ideals don’t exist. The international community’s response in no way matches the scale of devastation. A debt waiver is out of the question.

Ishaq Dar would have to put his team to explore two options: debt suspension (suspending the payments for the time being but paying later), and the second, which is only applicable for Paris Club lenders, is a debt (for flood recovery) swap arrangement. A debt swap is an arrangement in which the markup payment is diverted to a fund used to finance a development cause. Pakistan has availed it (albeit in tiny amounts) for Afghan refugees’ rehabilitation and earthquake reconstruction.

Besides bridging the fiscal (rupee) and current account (dollars) deficits, Ishaq Dar would also have to bridge the widening trust deficit between the government and the people. There is no denying that the people of Pakistan are hurting amidst the Triple-C crisis. Ishaq Dar’s job is to turn the hurt into hope, and that is what will give him sleepless nights. Let’s wait and see if he can do the needful.

The writer heads the Sustainable Development Policy Institute.

Twitter: @abidsuleri