Dar unpegged

Published January 28, 2023

IT is over. Nearly four months after Ishaq Dar descended on the cash-strapped economy with some decidedly outlandish plans — plans which seemingly centred on staring down one of Pakistan’s most powerful creditors — his humbling is complete. Unable to continue artificially suppressing dollar demand amidst drying up inflows, the authorities surrendered this week. With the collapse of the so-called ‘Dar peg’, the dollar-rupee exchange rate whiplashed to new highs on Thursday. The unprecedented volatility was a punch in the gut to market participants, who were seemingly caught unawares. Currency dealers complained of a lack of coordination between the finance ministry and the central bank while the chaos unfolded, and the dollar appreciated in both absolute and percentage terms at a level unprecedented since the new exchange rate mechanism was introduced in 1999, according to observers. To top it off, the finance minister, who should have displayed more responsibility, was nowhere to be seen while his single biggest policy decision was being undone.

The knock-on effects of the dollar’s sudden rise on already red-hot inflation will soon follow. All imported items have suddenly gotten a lot more expensive, including various food items, petrol and diesel. Raw material imports for local industries have also become dearer, and the cost increases will invariably be passed on to customers. The State Bank will be under pressure to increase interest rates again at its next policy meeting to grapple with this new round of inflation. The cost of doing business will consequently rise. These adjustments would not have been as sudden and painful had the government simply continued on the path Mr Dar’s predecessor set. Given time, markets would have adjusted by now and in a more tolerable manner than they will in the next few weeks. Had the PML-N’s London leadership not intervened and sought to prevail by imposing Mr Dar on Islamabad, the country may have been spared the inflationary wrecking ball now swinging its way. Alas, we can only hope that Mr Dar’s magic show is now over. His last act should be to quietly disappear from Q Block altogether. No amount of blaming the previous government or the historical mismanagement of the economy will absolve him of blame for the damage he has wreaked and the misery he has guaranteed for the people in what should be his last stint as finance minister.

Published in Dawn, January 28th, 2023

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