Will Lower Interest Rates, Tame Inflation: Dar – Mettis Global Link

September 28, 2022: Pakistan’s new finance minister, Ishaq Dar, said on Wednesday he would work to control inflation and lower interest rates.

In live televised remarks after his swearing in, Dar warned foreign exchange speculators, saying the Pakistani rupee was undervalued.

“We will control inflation. We will lower interest rates,” he said.

Dar has strongly favored intervention in the currency markets in his previous three terms, but this time faces a nation in economic crisis and the conditions of an International Monetary Fund (IMF) program.

Dar, a veteran politician and chartered accountant, was sworn in on Wednesday.

The 72-year-old faces the daunting task of stabilizing an economy that has been in freefall for months in the face of multiple threats of high inflation, a widening current account deficit and dwindling reserves – and who is now reeling from devastating floods.

Currently a senator, Dar has a solid reputation thanks to his previous terms as finance minister, most recently from 2013 to 2017.

“Dar is an interventionist,” economist and former Citigroup banker Yousuf Nazar told Reuters. The minister is best known for having heavily armed the central bank to generously inject foreign currency into the market in order to support the rupee.

“He would like to see lower interest rates and a stronger rupee,” Nazar said. But he added that the current global environment and the ongoing IMF program would not allow Dar to pursue his signature policies.

Pakistan’s foreign exchange reserves are currently at a level that covers just over a month of imports, making intervention difficult.

In addition, under the ongoing IMF program, Pakistan has accepted a market-based exchange rate regime and earlier this year passed a law that gave more autonomy to the central bank and insulated it government pressure.

Dar’s predecessor, Miftah Ismail, was a supporter of following a painful IMF stabilization program, which included the removal of fuel and electricity subsidies, despite the political cost with inflation exceeding 27% year-on-year. other and the rupee falling to historic lows.

Recently, however, the government said the IMF had indicated it would ease program conditions due to devastating floods that reportedly caused around $30 billion in losses, and slow growth this year to less than 3% from to a previous estimate of 5%. .

Prior to Dar’s official appointment, the rupee has risen in the past three sessions this week – either an indication that the market was inflated due to a lack of control or pricing in intervention.

“No rookie”

“Mr Dar’s main challenge is to stabilize the exchange rate in order to put the massive inflation genie back in the bottle,” Aqdas Afzal, an economics professor at Habib University in Karachi, told Reuters, adding that the government wanted to use Dar’s previous experience in taming inflation, which she desperately needs before the next election.

“Dar is no rookie when it comes to managing the economy,” he said.

But Dar’s policies have many critics, who say he has caused the rupee to remain overvalued and hurt the trade balance. It is this policy, critics say, that inflated the current account deficit to record highs of nearly $20 billion in fiscal year 2017-18.

The South Asian nation of 220 million had to return to the IMF for help months later in 2019.

An advantage for Dar is that he enjoys the full confidence of former Prime Minister Nawaz Sharif, who heads the Pakistan Muslim League-Nawaz (PML-N). Nawaz’s younger brother, Shehbaz, is currently the country’s Prime Minister as Nawaz himself is in exile in London.

Dar is also related to the Sharif family by marriage. His son is married to the eldest Sharif’s daughter, giving him a seat in the innermost circle of the party and the freedom to make quick decisions and reduce the red tape that hampers governance in Pakistan.

Managing the economy will not be his only challenge: he returns to Pakistan after five years of self-imposed exile, during which he was declared a fugitive by a Pakistani court due to his failure to appear in anti-corruption proceedings against him.

Dar says the case is politically motivated.

His arrest warrants were suspended last week by the court, allowing him to travel to Pakistan without fear of arrest until October 7, Justice Ministry prosecutors said. He was almost immediately given the role of post-development finance minister.

Dar attended accounting institutes in London and Wales after studying commerce and accounting in the eastern city of Lahore, a hometown he shares with the Sharif. He entered politics in the 1980s and served several terms as a parliamentarian.

He previously served as finance minister in 1998-99, 2008 and 2013-17 – as well as holding commerce, trade, industry and investment portfolios.

Reuters

Published on:2022-09-28T12:18:26+05:00

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Leslie M. Gill