he recent World Bank publication, World Bank Regional Economic Updates – October 2022 has noted that most countries in South Asia are already coping with high commodity prices, supply bottlenecks and vulnerabilities in the financial sector. The geopolitical situation informed by the war in Ukraine is amplifying these challenges, adding to inflation, increasing fiscal deficits and causing current account balances to deteriorate.

Given the current situation, the governments need to carefully plan monetary and fiscal policies to counter external shocks and protect the vulnerable classes. Simultaneously, the war and its impact on fuel prices offer the region the much-needed stimulus to reduce their reliance on fuel imports and transition to alternative, green and cheaper energy resources.

Against the backdrop of this challenging global economic situation, a change of command has taken place in Pakistan with Miftah Ismail resigning and Muhammad Ishaq Dar taking office as federal minister for finance for the fourth time. For decades, Dar has been the “in-house” economic wizard for the Pakistan Muslim League (Nawaz). Whenever the PML-N has an opportunity to govern the country, Dar has been their first choice.

The reins of economy were handed over by the Pakistan Tehreek-i-Insaf (PTI) to the coalition government of Pakistan Democratic Movement (PDM) in April earlier this year. The succeeding government found itself between the devil and the deep sea as the economy was fast heading towards an external default. A default appeared imminent when talks with the International Monetary Fund (IMF) for the resumption of the Extended Fund Facility (EFF) arrangement failed. With limited options on the table, Miftah Ismail, the former finance minister, took the bold step to roll back the unsustainable fuel and energy subsidies announced by PTI government in its last days before being removed from the office through a no-confidence motion.

The economic landmines laid by the PTI were removed by the PDM government which, in the process, lost significant political capital. It’s an undisputed fact that Miftah Ismail averted the risk of default and successfully negotiated the resumption of the EFF arrangement with the IMF. However, the policy measures undertaken in the process eroded the purchasing power of the common man.

The rupee witnessed the worst spells of devaluation, losing more than 30 percent of its value against the American dollar in a month; inflation skyrocketed and Consumer Price Index (CPI) for July to August was recorded at 26.1 percent as against 8.4 percent in the corresponding period in 2021.

The government undertook several steps to manage the exchange reserve challenge. Due to these measures, the current account posted a $1.9 billion deficit for July-August of the fiscal year (FY) 2023 as compared to a $2.4 billion deficit in the corresponding period last year.

An increase in exports also contributed to curtailing the deficit. Exports had a growth of 11.3 percent during July-August FY23 and reached $5.1 billion. Resultantly, trade deficit for July-August FY23 was recorded at $6.0 billion as against $6.8 billion last year.

The immediate task for the new finance minister is to steer the country out of stagflation. If this situation persists it will most likely trigger business closures leading to high unemployment and low revenues, both domestic and export-based.

Challenges like disruptions due to historic floods, high 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 percent in July FY 2023 against 4.4 percent growth in the corresponding period last year. It is pertinent to mention that despite the floods and import restrictions, the Federal Board of Revenue has been able to surpass the assigned target by Rs 22.5 billion during July-August FY 2023 and net revenue collection (provisional) grew by 9.7 percent to reach Rs 948.1 billion against Rs 864.5 billion in the same period last year.

The immediate task for the new finance minister is to steer the country out of stagflation. If the situation persists, it will most likely trigger business closures leading to high unemployment and low revenues, both domestic and export-based. Businesses are in dire need of breathing space. Inflation and interest rates need to be brought down to more reasonable levels and exchange rate adversities managed so that they can undertake cost-effective activities.

While Pakistan has been able to avoid immediate default, given the expectation of a global recession and slowdown of the local economy, the risk is far from over. 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 the 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 an equilibrium between targets set by the lenders and protecting socio-economic interests of the citizens. He is the only finance minister of Pakistan to have completed an IMF 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 previously in 1997-1999, he successfully retained the strength of Pakistani rupee through policy and administrative measures that played a pivotal role in avoiding high inflation levels.

There was much criticism of the high current account deficit when the PML-N left office in 2018. However, a detailed analysis shows that import of plant and machinery was the key contributing factor. The import was directly linked to increased domestic economic activity and helping to boost growth and address the chronic problem of load shedding in Pakistan.

It was widely alleged that the exchange rate was “artificially managed” at a high level due to which exports remained stagnant during 2013-2018. However, the export-related challenges were primarily due to global market conditions. World Trade Organisation publications show that global merchandise trade volume was on a constant decline from 2013 to 2016 and started rising only in 2017. Still, there was no significant growth till 2017 in value terms.

The current situation will test Ishaq Dar’s skill-set. He has very little time to showcase his ability and rebuild the lost economic momentum. Economists, traders and business entrepreneurs have already been ringing the alarm bells. Any delay in taking corrective measures can be fatal for both the hopes of recovery and the PML-N’s political capital.

Abdul Rauf Shakoori is a corporate lawyer based in the USA  

Dr Ikramul Haq, an advocate of the Supreme Court and writer, is an adjunct faculty at Lahore University of Management Sciences (LUMS)