The public tit-for-tat rant between former finance minister Miftah Ismail and his successor Ishaq Dar over the breach of commitments given to the International Monetary Fund has once again heightened risks to Pakistan’s economy due to a change of command at the Q Block.
It is the second time in the past one-and-a-half years when due to a change of the finance minister, the country’s economic policies will undergo drastic changes.
Unlike former finance minister Dr Hafeez Shaikh, who did not publicly react to his sacking in March 2021, Ismail seems determined to fight back over his unceremonious exit from Q Block – the seat of the finance ministry.
Dr Shaikh had managed to stabilise the economy but he could not ensure economic growth, nor was he able to contain inflation. His successor, Shaukat Tarin came with a bang, opened the public purse to achieve “6% to 7% growth rate”, helped by a loose monetary policy adopted by Dr Reza Baqir-led central bank but left the country on the verge of default.
Miftah took the baton at a time when there were high chances of a default and foreign banks were not confirming Pakistan’s Letter to Credit to import crude oil and petrol. He was also facing a hostile IMF, which was furious over constant breach of commitments given by respective finance ministers.
But since the beginning, Ismail and Dar could not go along and both had serious differences of opinions on the IMF deal and the phasing out of fuel subsidies. Dar was never in favour of withdrawing the subsidies till June 2022, or until the IMF programme was revived.
Miftah was facing the challenge of saving the economy from an imminent default and eventually former prime minister Nawaz Sharif had to swallow the bitter pill and allowed the increase in prices.
This was not the first time that Dar and Ismail had serious policy differences.
Earlier, in January 2018, Dar had reacted to Miftah’s decision to devalue the currency by Rs10 to a dollar and taking to Rs115.
Miftah’s handling of taxing traders – who make up the core of the PML-N’s vote bank – also created rifts between the London and the Islamabad camps of the PML-N.
There has been discomfort within the ruling alliance against the IMF-guided policies. This also caused some frictions between Nawaz Sharif and his younger brother, the incumbent PM, Shehbaz Sharif.
The incident happened around August 14 when the government decided to increase fuel prices again, despite opposition by Nawaz Sharif and Ishaq Dar to the move.
Against this background, when Dar announced decreasing the petrol price by Rs12.63 per liter by adjusting taxes, Miftah reacted to it by describing a “reckless decision”, knowing that any breach of the timeline agreed with the IMF to gradually increase fuel taxes to Rs50 per liter was a “red-line for the IMF”.
Pakistan has committed to increase the petroleum levy on petrol by Rs30 per liter till September 1, and on diesel by Rs15 per on September 1, 2022 and take it to Rs50 per liter in January 2023 on petrol and Rs50 per liter on by April 2023 diesel.
Miftah prematurely increased it to Rs37.5 per liter despite the IMF had set the Rs35 per liter limit for petrol for October 1. Dar has cut it to Rs32.5 per liter on petrol, which is not very low compared to the October 1 requirement.
“I know how to deal with the IMF and no one has to worry about anything regarding it anymore,” said Dar said while responding to Miftah’s comment during a show on the private news channel.
“I have to handle the IMF matters, so from now on, neither Miftah nor anybody else has to worry about anything,” he added.
Dar went on to say that he knew how to do it as he has solutions and has been dealing with the IMF for the last 25 years. Dar also said that the “actual value of the Pakistani rupee is less than 200 against the dollar” and vowed to bring it down.
However, Ismail, too, has breached the IMF commitments as finance minister. On September 1, he was supposed to set taxes on diesel at Rs15 per liter but he lowered it to Rs7.58 per liter. In lieu of that, he increased the petroleum levy on petrol to Rs37.50 per liter — a move that was also unjustified.
Not only that, in August this year, Ismail withdrew up to Rs6,000 per month tax on every retail shop, causing a dent of Rs42 billion to the revenue. He, however, had taken measures to recover Rs23 billion from them, resulting in net relief of around Rs19 billion to the retailers.
The government was supposed to increase taxes on retailers from October 1 to compensate these losses. But neither Ismail prepared a plan, nor Dar has yet decided to do it.
Ismail had also given Rs30 billion supplementary budget to the Pakistan State Oil and another Rs650 million to the Ministry of Information, in violation of the IMF deal.
The rift between members of the federal cabinet has sent a wrong message to the world, which may undermine Pakistan’s claim to the international financial support to compensate the losses caused by the devastating floods.
The world will perceive Pakistan as a country who is not ready to mend its house but is eying for aid from the developed world.
Both Ismail and Dar also have different exchange rate polices. Since April this year, the rupee depreciated nearly 32% or Rs58 per US dollar to Rs240 – which was also the last day of Ismail in the office.
The depreciation was erratic and was not consistent with the economic fundamentals even after incorporating the impact of the global strengthening of the US currency. This had given strong impression that the currency was being manipulated.
Since Dar’s arrival in Pakistan on September 26, the rupee has recovered about 5% of its value and closed at Rs227 to a dollar on Monday, apparently without any intervention in the market by the central bank.
The IMF-guided policies have also caused high inflation, unprecedented devaluation of the rupee, even more than what the economic fundamentals dictate, and slowed down of the economic wheel.
But implementation of the policies was necessary to ease pressure on the external account and avoid looming default. Dar wants to reverse the trend by building its case on the devastation caused by the floods.
The suspension or derailment of the IMF programme because of any reason will not augur well for Pakistan’s external sector viability. The country does not have the luxury to irritate the IMF anymore amid prolonged deep mistrust between both the sides.
The only option that seems available to the policymakers is to remain on the right side of the United States, if it wants to get some concessions from the IMF against harsh conditions.