Mr Dar and the Triple-C Challenge

The “Triple-C” crisis (Covid-19, conflict and climate change) is giving finance ministers all over the world sleepless nights. Let me explain why:

Take Covid-19 first; the global economy contracted by around 4.3% in 2020, a setback only matched by the Great Depression and the two World Wars. In 2021, before the start of the Russian-Ukrainian war, the World Bank projected that global GDP growth for 2022 would remain slow (4.4% below its pre-pandemic forecast) due to the impacts of Covid- 19.

The conflict in Ukraine started in February 2022. One of the victims of this conflict is the supply of grain, energy, fertilizers and other raw materials; supplies from Russia have become non-kosher due to Western sanctions, while supplies from Ukraine are inaccessible. The reduction in supplies (especially energy) has raised global inflation by 2.9% so far and is expected to raise global inflation by another 2% next year. Oil-importing countries like Pakistan are most affected by this inflation due to the high cost of imported energy. The deterioration in the balance of payments is one of the reasons why the Pakistani rupee is losing its value against the US dollar.

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

The lengthy introduction above explains Ishaq Dar’s challenges as Pakistan’s outgoing finance minister. The four main challenges for him are containing inflation, stabilizing the value of the rupee, regaining the confidence of multilateral lenders and mobilizing funds for flood recovery.

Energy and food inflation are the main contributors to the current price rise in Pakistan. The decline in fuel inflation depends on oil prices on the international market. Low import prices provide a greater cushion for the Minister of Finance to increase the Petroleum Development Levy – PDL – (in line with our commitment to the IMF) without further harming consumers.

As I write this article, international oil prices are heading south. Prices for ‘Arab Extra Light’ have risen from $102 per barrel to $89 per barrel over the past three weeks. If this trend continues, Dar would have enough cushion to reduce domestic retail gasoline and diesel prices while increasing the LDP. If crude prices rise due to an escalation of the conflict in Ukraine, then there would be no room to ease energy prices.

On the food price front, it would not be able to contain wheat and wheat flour (wwfp) prices in the short to medium term. The WWFP would continue to rise over the coming winter, and that has nothing to do with stagnant floodwaters on farmland. The latter would negatively affect wheat sowing for the next season and could lead to a shortage of wheat next summer (2023). The current wwfp trek has its roots in the tussle to rule Punjab.

The Punjab Food Department, which historically supplied subsidized wheat to flour mills in September, started deliveries in May, just after the wheat supply campaign when the private sector (including flour mills) had sufficient stocks. . Now that a significant portion of Sindh Food Department’s wheat has been inundated due to floods and Punjab Food Department’s supplies are short due to earlier than expected releases, the sector private sector sells its wheat at exorbitant prices, which leads to a rise in the wwfp. The crackdown on wheat hoarders in one province is beyond the mandate of the federal government, where Ishaq Dar has little or no say.

The best bet for Mr. Dar here would be to increase allocations for social safety nets, link BISP payments to the price-sensitive index so that quarterly allocations do not erode with inflation, and to bring those earning up to Rs 50,000 per month under the BISP. cover. Similarly, Mr. Dar should also assess the effectiveness of utility stores and programs such as “sasta bazaars” and the like. The waste of resources by theft in 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 rupiah had been under pressure mainly due to demand for dollars exceeding their supply, but also due to speculative buying of dollars by manipulators, panic buying by the general public and irresponsible behavior (starvation of the profit) of some commercial banks and foreign exchange (forex) dealers.

Artificially boosting the value of the rupee has major drawbacks. 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 boost the value of the rupee. With less than a few weeks of foreign exchange reserves (and due to IMF surveillance), the SBP is no longer (and will no longer be) able to do the same.

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

To regain the confidence of multilateral lenders, Mr. Dar has an inherent advantage. Unlike Miftah Ismail, who faced criticism within the cabinet and party leadership for his policies and actions, Ishaq Dar’s opinion would prevail due to his personality within the cabinet and his stature in the party. The slim chance of the cabinet/party challenging its commitments with the IMF and other lenders would help it regain the trust of the IMF. How quickly he would come to terms with the IMF and his ability to ease the pace and sequence of the IMF program would be a litmus test of his ability to deal with multilaterals.

The final challenge facing Ishaq Dar is raising funds for flood recovery. Ideally, we should be compensated for loss and damage caused by devastating floods. However, ideals do not exist. The response of the international community in no way matches the scale of the devastation. Debt forgiveness is out of the question.

Ishaq Dar is expected to put his team to explore two options: debt suspension (suspend payments for now but pay later), and the second, which only applies to Paris Club lenders, is a swap debt (for flood recovery) arrangement. A debt swap is an arrangement in which the mark-up payment is diverted to a fund used to finance a development cause. Pakistan has used it (albeit in small quantities) for the rehabilitation of Afghan refugees and reconstruction after the earthquake.

In addition to closing the budget (rupee) and current account (dollar) deficits, Ishaq Dar should also close the growing trust gap between the government and the people. There is no denying that the people of Pakistan are suffering amid the Triple-C crisis. Ishaq Dar’s job is to turn pain into hope, and that’s what will give him sleepless nights. Let’s wait to see if he can do the needful.

The author directs the Sustainable Development Policy Institute.

Twitter: @abidsuleri

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