Former finance minister Mohammad Ishaq Dar has said that it has become a habit of the Pakistan Tehreek-i-Insaf (PTI) government to lay the blame of its imprudent and thoughtless devaluation and interest rate hike on the policies of the previous government. Talking to TFT in an exclusive interview, he said that nothing is farther from the truth and that the PTI government was only looking for an alibi to cover its colossal economic mismanagement which has led to the grounding of the economy.
Dar said that the exchange rate stability and rapid decline in the interest rate during the Pakistan Muslim League-Nawaz’s (PML-N) government were the results of an all-round stability, unprecedented build-up of forex reserves and historic reduction in inflation and poverty.
He explained that when the PML-N government took office in June 2013, SBP foreign exchange reserves were at $6 billion. Of this, $2 billion were a swap with China and its repayment was due within a few months. More significantly, there was $4 billion worth of IMF loans due in the next 18 months which was taken by the previous government and left behind for the new government to repay. “The PML-N showed responsibility and never complained that the previous government bequeathed to us such liabilities,” he said. Moreover, there were predictions that Pakistan would declare ‘sovereign default’ within a few months if it continued on its current economic path. “For those who knew the schedule of loan repayments and the state of the economy, this was a matter of fact and not just rumours.”
Dar said that knowing the ground realities, “We made a quick move to work-out an IMF program within days and signed it on July 4, 2013. We were given a highly austere program which disbursed resources in 13 equal quarterly instalments of about $450 million each, unlike a front loaded program to the PTI that disbursed $1 billion in the first tranche. We also worked hard to secure cheap policy loans from Asian Development Bank and the World Bank in lieu of carrying many reforms in various sectors, which resulted in disbursements of such loans in the last quarter of FY14. During this period, as predicted prior to general election in May 2013, the forex reserves reached a perilous level of $3 billion in January 2014 and on several occasions, the rupee came under intense pressure. However, we kept a strong oversight and liaison with all concerned and managed to preserve exchange rate stability.”
He said that from the very outset and till the end, “we had never agreed with IMF of any condition that required devaluation of the rupee or raising the interest rates. What we did agree was forex reserves accumulation targets and a commitment to maintain positive real interest rates. By contrast, the PTI government indulged in a massive rupee devaluation and interest rate increase even before formally entering an IMF program. As part of the prior actions, we were required to purchase $125 million from the market, which was accomplished with minimum disruption to exchange rate stability. Once the program moved into full swing and reforms agenda was faithfully implemented there was no looking back.”
He said the PML-N government not only met forex reserves targets agreed with IMF throughout the program but on at least two occasions voluntarily raised such targets as the market offered to mobilize foreign resources due to stable rupee as well as continuous improvement in macroeconomic indicators.
Dar said that uninterrupted build-up of foreign reserves by the PML-N was unprecedented in the country’s history. At the beginning of October 2016, forex reserves stood over $24 billion, including with SBP reserves over $19 billion. “This level of reserves has been historic and there appears no chance that the PTI government’s failed economic policies would enable to achieve that level again,” he said.
He emphasised that it is in this background that one should evaluate the policy of a stable exchange rate which was earnestly accomplished by the PML-N government. In June 2013 the outstanding external debt was $48.1 billion and this figure rose at end June 2017 to 62.5 billion which amounted to a net addition of $14.4 billion. The average cost of this additional debt was less than three percent. Out of this increase in external debt, $10.5 billion was used to build up forex reserves, taking it to $16.5 billion on June 30, 2017 from a meagre $6 billion in June 2013 and balance of $3.9 billion was used to finance current account deficit during 2013-17. Political instability caused by removal of PM Nawaz Sharif led to deterioration of economic conditions and this coupled with higher unprecedented CPEC/development/energy/security related imports bill in last year 2017-18 of the PML-N government, the external debt increased by $7.7 billion to $70.2 billion and forex reserves declined to $16.4 billion including with SBP $9.8 billion. Resultantly, current account deficit increased to $14.4 billion for the last year of the PML-N government. “But in return, the nation had load shedding-free Pakistan with far better security situation in the country after financing of Zarb-e-Azab, Raddul Fasad and Karachi peace operations,” he said.
In response to the PTI claim that the PML-N government had artificially controlled the exchange rate, Dar replied that this was absolutely baseless. “How can that be possible for a long four-year period? In December 2017, the Bloomberg reported that Pakistani rupee had been the most stable currency in South Asia since 2014. We have given the full account of external debt and forex reserves accumulation. If this were to happen, the reserves would not have been rising and reaching the historic high. There is no other way to hold the exchange rate stable.”
“In post-nuclear detonation, $/rupee touched 67/69 in September 1998 due to the havoc played by some speculators but the PML-N handled it timely and effectively which brought parity back to 52 and remained stable there for months till the October 1999 coup.”
Dar said the exchange rate regime pursued by the PML-N government in its recent tenure was no different than what it established in early 1999, where the inter-bank market in forex was established which is the sole determinant of the exchange rate. “The PML-N’s two decades old introduced regime continues to this day, no matter the hype created regarding market determined exchange rate or real effective exchange rate (REER).”
Dar said that the myth of artificiality has been contrived by an ill-prepared PTI government which got installed without having any plan, policy or road map. It immediately lost the market’s confidence as it failed to present any credible economic plan to the nation and global institutions.
In response to another question whether he was asked as Finance Minister by IMF during program 2013-16 to devalue rupee, Dar confirmed that “IMF pressed us to artificially devalue the rupee in the name of over-valuation with respect to some vague notion of real effective exchange rate (REER) based on its chosen index of price movements with our trading partners but we flatly refused such demands because the agreed program in July 2013 only required that we meet forex reserves accumulation targets, which we did diligently.”
He said, “the IMF’s concern for export stagnation was also rebutted by the government on account of the fact that it was due to adverse terms of trade (ToT) for our leading exports of which larger quantities were exported at lower prices and therefore there was no structural impediment.”
It was further noted that the country was essentially a net beneficiary of global low commodity prices since it had a large oil import bill, which was significantly reduced than the loss of revenues in leading exports.
Dar emphasised that those who advocate devaluation as the panacea for increasing exports should serious reflect that exports for FY16 and FY17 were $22 billion each.
Having completed the IMF program in September 2016, we engaged the Exporters Associations to work out a relief package with which they would deliver growth in exports. On January 10, 2017, mutually agreed Rs180 billion exporters package was announced by PM Nawaz Sharif and later in August 2017, it was beefed up with another Rs67 billion, thereby making it a total of Rs247 billion which led the exports to grow by 12.7 percent to $24.8 billion in FY18. “Had this formula been followed by the PTI in coming FY19 and FY20, we would have ended with exports figure of around $31 billion by June 2020. But the PTI government chose to follow pseudo intellectuals’ bookish theory, who were demanding a slide of rupee to $/127 to boost exports, and allowed self-slide of rupee devaluation but could not manage till it slid to $/160s. Soon after it crossed $/127, such pseudo intellectuals publically distanced themselves from the PTI’s policy and criticised them on camera. Despite massive devaluation, FY19 ended up with negative growth of two percent with $24.2 billion. In current FY20, there has been so far meagre growth of around four percent “While the PML-N insulated 92 percent of the economy (exports being 8 percent) from damage from devaluation and got growth of 12.7 percent in exports with targeted support, the PTI has ruined the entire economy by blindly sliding the rupee which resulted in massive inflation for the common man and shrunk the GDP growth of 5.8 percent that it inherited from PML-N to 2.4 percent with contraction of $40 billion its size. Food inflation has reached 23.8 percent in rural and 19.5 percent in urban areas last month as compared to less than two percent in last year of the PML-N.”
Regarding interest rate policy during the PML-N and the PTI governments, Dar explained that after average inflation of 12 percent during 2008-13, the PMLN’s policy was to bring down inflation in order to facilitate reduction in the interest rate in the country for making business and industry viable. “With improvement in macroeconomic indicators, better sovereign ratings and built up of forex reserves with stable rupee, the PMLN managed to bring down in its tenure SBP policy rate to 6.25 percent, export refinance to three percent and and long term finance facility to 3% which were lowest in decades; with core inflation at 4 percent the real interest rate was positive at 2.25 percent. This extraordinary achievement of bringing down interest rate to historic low was achieved on the back of very low inflation rates. There was no artificiality in this effort. The credit to private sector nearly doubled during the tenure of the PML-N government from Rs.3.3 trillion to Rs.6 trillion. Contrast to the PML-N’s performance, the PTI has raised interest rate to 13.25 percent due to decades high inflation triggered by massive devaluation of rupee. Dar said that it is not surprising that the non-performing loans have risen to 23 percent, which is highest in eight years, as a result of failed monetary policy. Sadly, he said, the PTI government has now been raising dollars by issuing short term sovereign paper with 13.25 percent interest rate known as ‘Hot Money.’”
Concluding, Dar said that globally recognised economic performance of the PML-N, which was unfortunately hindered by political instability in the country, has been maligned by the PTI government to whitewash its incompetence and mis-management of economy. He said with declining LSM production, lower petroleum consumption, gas crisis, flat electricity consumption, and major cotton crop failure, the modest GDP growth target of 2.4 percent for current fiscal year looks fairly difficult. He further added that declining GDP growth is resulting in rising unemployment with 2 million added to jobless and 7 million added to poverty line; even the upper middle class is feeling the pinch and the pain as inflation peaking, disposable incomes falling and demand receding. He summed up that unprecedented inflation in a short period of 18 months of the PTI government has been driven by disastrous devaluation and interest rate hike.
Dar said that the exchange rate stability and rapid decline in the interest rate during the Pakistan Muslim League-Nawaz’s (PML-N) government were the results of an all-round stability, unprecedented build-up of forex reserves and historic reduction in inflation and poverty.
He explained that when the PML-N government took office in June 2013, SBP foreign exchange reserves were at $6 billion. Of this, $2 billion were a swap with China and its repayment was due within a few months. More significantly, there was $4 billion worth of IMF loans due in the next 18 months which was taken by the previous government and left behind for the new government to repay. “The PML-N showed responsibility and never complained that the previous government bequeathed to us such liabilities,” he said. Moreover, there were predictions that Pakistan would declare ‘sovereign default’ within a few months if it continued on its current economic path. “For those who knew the schedule of loan repayments and the state of the economy, this was a matter of fact and not just rumours.”
He said the PML-N government not only met forex reserves targets agreed with IMF throughout the program but on at least two occasions voluntarily raised such targets
Dar said that knowing the ground realities, “We made a quick move to work-out an IMF program within days and signed it on July 4, 2013. We were given a highly austere program which disbursed resources in 13 equal quarterly instalments of about $450 million each, unlike a front loaded program to the PTI that disbursed $1 billion in the first tranche. We also worked hard to secure cheap policy loans from Asian Development Bank and the World Bank in lieu of carrying many reforms in various sectors, which resulted in disbursements of such loans in the last quarter of FY14. During this period, as predicted prior to general election in May 2013, the forex reserves reached a perilous level of $3 billion in January 2014 and on several occasions, the rupee came under intense pressure. However, we kept a strong oversight and liaison with all concerned and managed to preserve exchange rate stability.”
He said that from the very outset and till the end, “we had never agreed with IMF of any condition that required devaluation of the rupee or raising the interest rates. What we did agree was forex reserves accumulation targets and a commitment to maintain positive real interest rates. By contrast, the PTI government indulged in a massive rupee devaluation and interest rate increase even before formally entering an IMF program. As part of the prior actions, we were required to purchase $125 million from the market, which was accomplished with minimum disruption to exchange rate stability. Once the program moved into full swing and reforms agenda was faithfully implemented there was no looking back.”
He said the PML-N government not only met forex reserves targets agreed with IMF throughout the program but on at least two occasions voluntarily raised such targets as the market offered to mobilize foreign resources due to stable rupee as well as continuous improvement in macroeconomic indicators.
Dar said that uninterrupted build-up of foreign reserves by the PML-N was unprecedented in the country’s history. At the beginning of October 2016, forex reserves stood over $24 billion, including with SBP reserves over $19 billion. “This level of reserves has been historic and there appears no chance that the PTI government’s failed economic policies would enable to achieve that level again,” he said.
He emphasised that it is in this background that one should evaluate the policy of a stable exchange rate which was earnestly accomplished by the PML-N government. In June 2013 the outstanding external debt was $48.1 billion and this figure rose at end June 2017 to 62.5 billion which amounted to a net addition of $14.4 billion. The average cost of this additional debt was less than three percent. Out of this increase in external debt, $10.5 billion was used to build up forex reserves, taking it to $16.5 billion on June 30, 2017 from a meagre $6 billion in June 2013 and balance of $3.9 billion was used to finance current account deficit during 2013-17. Political instability caused by removal of PM Nawaz Sharif led to deterioration of economic conditions and this coupled with higher unprecedented CPEC/development/energy/security related imports bill in last year 2017-18 of the PML-N government, the external debt increased by $7.7 billion to $70.2 billion and forex reserves declined to $16.4 billion including with SBP $9.8 billion. Resultantly, current account deficit increased to $14.4 billion for the last year of the PML-N government. “But in return, the nation had load shedding-free Pakistan with far better security situation in the country after financing of Zarb-e-Azab, Raddul Fasad and Karachi peace operations,” he said.
In response to the PTI claim that the PML-N government had artificially controlled the exchange rate, Dar replied that this was absolutely baseless. “How can that be possible for a long four-year period? In December 2017, the Bloomberg reported that Pakistani rupee had been the most stable currency in South Asia since 2014. We have given the full account of external debt and forex reserves accumulation. If this were to happen, the reserves would not have been rising and reaching the historic high. There is no other way to hold the exchange rate stable.”
“In post-nuclear detonation, $/rupee touched 67/69 in September 1998 due to the havoc played by some speculators but the PML-N handled it timely and effectively which brought parity back to 52 and remained stable there for months till the October 1999 coup.”
Dar said the exchange rate regime pursued by the PML-N government in its recent tenure was no different than what it established in early 1999, where the inter-bank market in forex was established which is the sole determinant of the exchange rate. “The PML-N’s two decades old introduced regime continues to this day, no matter the hype created regarding market determined exchange rate or real effective exchange rate (REER).”
Dar said that the myth of artificiality has been contrived by an ill-prepared PTI government which got installed without having any plan, policy or road map. It immediately lost the market’s confidence as it failed to present any credible economic plan to the nation and global institutions.
In response to another question whether he was asked as Finance Minister by IMF during program 2013-16 to devalue rupee, Dar confirmed that “IMF pressed us to artificially devalue the rupee in the name of over-valuation with respect to some vague notion of real effective exchange rate (REER) based on its chosen index of price movements with our trading partners but we flatly refused such demands because the agreed program in July 2013 only required that we meet forex reserves accumulation targets, which we did diligently.”
He said, “the IMF’s concern for export stagnation was also rebutted by the government on account of the fact that it was due to adverse terms of trade (ToT) for our leading exports of which larger quantities were exported at lower prices and therefore there was no structural impediment.”
It was further noted that the country was essentially a net beneficiary of global low commodity prices since it had a large oil import bill, which was significantly reduced than the loss of revenues in leading exports.
Dar emphasised that those who advocate devaluation as the panacea for increasing exports should serious reflect that exports for FY16 and FY17 were $22 billion each.
Having completed the IMF program in September 2016, we engaged the Exporters Associations to work out a relief package with which they would deliver growth in exports. On January 10, 2017, mutually agreed Rs180 billion exporters package was announced by PM Nawaz Sharif and later in August 2017, it was beefed up with another Rs67 billion, thereby making it a total of Rs247 billion which led the exports to grow by 12.7 percent to $24.8 billion in FY18. “Had this formula been followed by the PTI in coming FY19 and FY20, we would have ended with exports figure of around $31 billion by June 2020. But the PTI government chose to follow pseudo intellectuals’ bookish theory, who were demanding a slide of rupee to $/127 to boost exports, and allowed self-slide of rupee devaluation but could not manage till it slid to $/160s. Soon after it crossed $/127, such pseudo intellectuals publically distanced themselves from the PTI’s policy and criticised them on camera. Despite massive devaluation, FY19 ended up with negative growth of two percent with $24.2 billion. In current FY20, there has been so far meagre growth of around four percent “While the PML-N insulated 92 percent of the economy (exports being 8 percent) from damage from devaluation and got growth of 12.7 percent in exports with targeted support, the PTI has ruined the entire economy by blindly sliding the rupee which resulted in massive inflation for the common man and shrunk the GDP growth of 5.8 percent that it inherited from PML-N to 2.4 percent with contraction of $40 billion its size. Food inflation has reached 23.8 percent in rural and 19.5 percent in urban areas last month as compared to less than two percent in last year of the PML-N.”
Regarding interest rate policy during the PML-N and the PTI governments, Dar explained that after average inflation of 12 percent during 2008-13, the PMLN’s policy was to bring down inflation in order to facilitate reduction in the interest rate in the country for making business and industry viable. “With improvement in macroeconomic indicators, better sovereign ratings and built up of forex reserves with stable rupee, the PMLN managed to bring down in its tenure SBP policy rate to 6.25 percent, export refinance to three percent and and long term finance facility to 3% which were lowest in decades; with core inflation at 4 percent the real interest rate was positive at 2.25 percent. This extraordinary achievement of bringing down interest rate to historic low was achieved on the back of very low inflation rates. There was no artificiality in this effort. The credit to private sector nearly doubled during the tenure of the PML-N government from Rs.3.3 trillion to Rs.6 trillion. Contrast to the PML-N’s performance, the PTI has raised interest rate to 13.25 percent due to decades high inflation triggered by massive devaluation of rupee. Dar said that it is not surprising that the non-performing loans have risen to 23 percent, which is highest in eight years, as a result of failed monetary policy. Sadly, he said, the PTI government has now been raising dollars by issuing short term sovereign paper with 13.25 percent interest rate known as ‘Hot Money.’”
Concluding, Dar said that globally recognised economic performance of the PML-N, which was unfortunately hindered by political instability in the country, has been maligned by the PTI government to whitewash its incompetence and mis-management of economy. He said with declining LSM production, lower petroleum consumption, gas crisis, flat electricity consumption, and major cotton crop failure, the modest GDP growth target of 2.4 percent for current fiscal year looks fairly difficult. He further added that declining GDP growth is resulting in rising unemployment with 2 million added to jobless and 7 million added to poverty line; even the upper middle class is feeling the pinch and the pain as inflation peaking, disposable incomes falling and demand receding. He summed up that unprecedented inflation in a short period of 18 months of the PTI government has been driven by disastrous devaluation and interest rate hike.