THIS was the one year that Pakistan needed a strong finance minister. The economy had been on a mild recovery that was gaining momentum since 2013. Growth rates in the real sector had revived, investment was rising. Power generation rose as load-shedding fell and the crippling gas shortages of the pre-2013 period were receding from memory.
But a crucial corner had been turned in this growth story even before the year opened. The external account registered a deficit in October 2016 that would grow with accelerating speed as 2017 wore on, doubling in the closing months of the year. Foreign exchange reserves fell steeply and the trade deficit widened by more than 28 per cent as growth of imports galloped along despite the government’s efforts to put restraints on them through measures like regulatory duties on ‘non-essential’ items.
This was the year when it all came together, the profits and the prophecy. Money was made by many in the years when Dar ruled the roost at Q Block, while warnings sounded that the good times would not last, that indebtedness was rising, both domestic and external, and that soon enough an adjustment to the underlying reality was going to be inevitable. As late as October 2017, Dar was still saying the level of the reserves was adequate, that revenues were showing encouraging growth, that expenditures were in line with budgetary allocations, that inflation was restrained.
2017 is the year the economy went officially adrift.
In short, to his last days, he kept swatting away the prophecies of doom that hung over his performance, sometimes with an incredulous look on his face, as if to say ‘why can these people not see the reality that I am trying to show them?’ There were two sides to his performance, he would acknowledge: the real sector growth and the external sector deficits. But invoking the same defence of those who ran Pervez Musharraf’s regime when they faced the same situation, he would say that the deficits were there to finance machinery imports, which were an investment in future growth and would eventually pay themselves off.
The year 2017 is when this explanation ran its course and reality began biting at the heels of the finance minister. Quite apart from his growing legal troubles, in the month of July a sudden sharp depreciation of the rupee, followed by an announcement by the State Bank that the new, depreciated rate was more “in line with the macroeconomic fundamentals” of the economy was the first blow to Dar’s blusterous confidence. That event broke like a bolt of lightning over his head, and he reacted accordingly.
The travails of the exchange rate broke in July while his indictment in the case against him in the courts came in October. Pressures on the external account, with reserves continuing to plummet, mounted in tandem with calls for the minister to step down, and let a fresh face take control as the economy wavered.
But Dar dug in his heels. He left the country shortly after his indictment, citing poor health, but tried to continue running the ministry via remote control. In September, calls for him to either be removed from office, or to voluntarily step down, escalated within parliament and the media. He increasingly came to be seen as hobbled and constrained by his legal troubles, confidence plummeted in his ability to steer the country precisely as the cracks in his own growth story were becoming too wide to be papered over.
In October, another battle the minister had been embroiled in burst into the open as the army chief made public remarks about the direction of the economy. The chief’s remarks focused specifically on one issue: security, which he described as the “first and foremost task of the state” before adding that “in today’s world, security does not come cheap”.
Dar shot back a few days later, replying that development and security are shared priorities, and the finite resources of the state must be divided between both. The tussle over control of the material resources of the state, between the security and developmental priorities of the government, had clearly assumed intense proportions for the debate to play out in public like this. No further public exchanges on this matter took place subsequently, but the pressures bearing upon the finance minister from behind the scenes, for resources to be allocated for security-related expenditures, were bared, even if for a fleeting moment.
On Nov 18, he finally bowed out of the post, leaving a vacuum filled only by a finance secretary on the cusp of retirement, and a prime minister already bogged down under a toxic brand of politics and a mountain of timelines for a long list of projects under implementation. The year 2017 is the year the economy was officially adrift, just as incoming data showed the current account deficit doubling from the same period last year.
Almost within days, the State Bank adjusted the exchange rate in the interbank market, down by five percentage points. The move sparked panic initially, but markets were quick to adapt since expectations of such a move had been built with persistent reports of the growing pressures in the external account in the days leading up to the move. Nevertheless, the move was an acknowledgement that the mounting pressures created by the external deficit and the falling reserves were not going away, despite a bevy of regulatory duties announced by the government on ‘non-essential imports’ only a few weeks earlier.
The legal difficulties may yet wither away, but the mammoth deficit opening up underneath the former finance minister’s growth story is unlikely to go away soon. The year 2017 will be remembered as the year when the economy turned the corner, and the grudging, haphazard acknowledgment of this reality will be the finance minister’s biggest legacy, regardless of how the case against him in the courts works out.
Published in Dawn, December 28th, 2017