The fault in our Dar(s)

By bringing in Dar as finance minister, the PML-N has made a catastrophic mistake that will blow away what little political capital the party has.
Published December 20, 2022

Pakistan is suffering from a pandemic of irrationality among its ruling elite. This irrationality has manifested itself in the form of public policies that have continuously failed in advancing the state of the country’s 230 million citizens.

In fact, the determination with which these policies are adopted time and again, with the expectation that they will yield different results, has meant that Pakistan today is the sick man of South Asia.

For the past few weeks, we have been experiencing the application of a particularly dangerous, irrational public policy. Like a fast-moving wildfire in the dry season, this policy has the potential to completely torch Pakistan’s economy and what little purchasing power remains with ordinary citizens.

I refer to this policy as the Dar Peg.

Shouting down the dollar

When he returned to Pakistan as the country’s next finance minister, the victorious Ishaq Dar was beaming. Confident in his ability to shout down the US dollar, Dar quickly went around holding a victory speech. But like George Bush Jr’s preemptive declaration of victory in Iraq, Dar’s pronouncements were premature. As the days went by, reality set in and the promise of bringing down the dollar to below the 200-mark fell by the wayside.

But rather than reassess the situation and follow a more rational policy, Dar has doubled down, fixing the interbank rate of the dollar at around Rs221. This has been achieved by setting a clearing price for the currency through the back door — dollars are being rationed through what can broadly be called administrative actions. How this is being done is beside the point; the outcome of this policy has been a widening spread between the interbank rate of the greenback and the price at which it is available in the informal, retail market.

At the time of writing this article, this spread is almost twenty-five rupees, if not more, meaning that the dollar is trading at around 245 rupees. The outcome of this policy has been that Dar, along with whoever believes that irrational public policies can yield beneficial results, is congratulating the minister for a job well done.

This supposed stability in the currency has also allowed the minister to pass down a petroleum price cut to citizens, as a weaker rupee would have cancelled the impact of a decline in global oil prices. It is also worth noting that for an ordinary household earning Rs30,000 a month (yes, this is close to what an ordinary household earns in Pakistan), the benefit of this cut is roughly Rs50 a month. Richer households consume more energy and will derive more benefits from this cut.

Black market wins

The Dar Peg is also disincentivizing the formal inflow of dollars into an economy that is already short of the currency. The reason is quite simple: why would rational economic actors send a commodity, in this case the dollar, through formal channels when the government-mandated price of the commodity is significantly lower than the price in the informal market?

Surely, everyone ranging from the blue-collar worker in Saudi Arabia to the financial services professional on Wall Street will refrain from using formal channels, or hold off on transfers while such a spread lasts in the market.

The knock-on impact of these actions by market participants is that the liquidity situation tightens further, forcing a further increase in the spread on offer. As a result, pressures only grow as a distorted currency price — which is used to trade with the rest of the world — distorts pricing in the entire economy, from pulses to petroleum products.

The eventual decimation of the Dar Peg is only a matter of time. And when this happens, prices across the entire economy will rapidly adjust upwards. The impact? Another round of inflation for a society that has experienced nearly 70 per cent inflation since January 2019.

All of this is likely to unfold in the coming weeks in the backdrop of increased political volatility, and potentially, elections.

By bringing in Dar as finance minister, the PML-N has made a catastrophic mistake that will blow away what little political capital the party has. Perhaps that is a fair and deserved outcome for a party that has imposed an irrational actor on Pakistan and whose actions are unleashing chaos on Pakistan’s teetering economy.