Between Dar and Atif, there is a field; I will meet you there

Treat your Ferrero Rochers the way you do your oil imports. Let them be imported indiscriminately and forget this categorisation of essential imports and non-essential imports to begin with. The current decision to clamp down on some import categories was taken because there aren’t enough dollars to go around, so we can’t even import essentials. That wouldn’t have been a problem had the foreign exchange market been left unfettered and the rupee been left to slide to its actual value versus the US dollar.

This was the gist of acclaimed economist Atif Mian in a recent thread on twitter, where he publicly opposed the government’s decision to ban non-essential imports. The reasons he cited were prudent, not because he’s partial to Ferrero Rochers (he doesn’t even live here, and he didn’t even take the italian confectionery item’s name) but because if governments were to start classifying imports, they would soon be faced with the task of deciding the fate of items that weren’t as clearly non-essential as the aforementioned chocolates. This would lead to arbitrary decisions and gatekeeping and, as is almost always the case in this neck of the woods, immense corruption, with industry lobbyists trying to grease senior bureaucratic palms to move their particular product off from one column to the other. Even if there weren’t any corruption, there would be lobbying of the ‘honest’ kind, as we famously saw when anchor person Ghareeda Farooqi’s tweet about the difficulty of getting imported dog food for her pet prompted the PML(N)’s heir apparent Maryam Nawaz to tweet to the then finance minister Miftah Ismail to ‘look into it.’

Even if one were to have absolutely principled mandarins, not susceptible to bribes or personal influence, they can still make wrong decisions. A lot of those non-essential items are key inputs for exporters; this is cut down on exports. And even on the other end of the trade deficit, what about the curtailment of imports? Some critical equipment for the Thar coal power project has been declared as non-essential. An irony, because once said projects were to start producing power, Pakistan would be importing lesser fuel for its thermal power plants.

Atif Mian then goes on to extrapolate from these initial points to painting a rather gloomy picture of the time to come, leading to lesser tax revenue, much higher fiscal deficit (since the government’s dues are to remain the same) and a vicious negative feedback loop which could be difficult to wrest oneself away from.

All good points. And I broadly agree.

But I do have some issues with his thesis. You see, Atif has clubbed together two issues: rupee devaluation and import restriction. That the government has had to do the latter because it was fixated on the former. There’s some merit in this reasoning; they’re closely related. But they aren’t the exact same thing. Personally, I am also in favour of letting the rupee be. But curbing (some, carefully selected non-essential) imports temporarily, and letting the rupee slide isn’t an either-or choice.

After all, didn’t the responsible Miftah also employ a somewhat similar strategy? Letting the rupee breathe a little and, at the same time, spell out a list of items that were off the table to import? Agreed his list was more concise, but the forex reserves situation then wasn’t this dire either. 

Let’s play out the counterfactual. An Atif-approved finance minister lets the dollar go up to its presumably natural value. Imports are now considerably more expensive and exports more competitive. So imports should come down, and exports should go up. Hence, no need to restrict imports and we don’t have a balance of payments crisis on our hands. Right?

But things aren’t all that clean. Imports would immediately be more expensive, whereas exports would take some time to increase in volume. During this adjustment time, since devaluation would have made imports more expensive, in the Pakistani context, it would have led to much higher inflation. The SBP would have handled this with the one trick it knows: hiking interest rates. This would further slow economic activity and yield lesser taxes for the government. This, coupled with the need for paying out even higher subsidies for the most affected (and recently unemployed) would lead to an even higher fiscal deficit.

Meanwhile, all of the government’s previous expenditures are still where they are. 

And let’s be realistic, the improved current account situation is not going to generate enough dollars to even pay off the foreign debt obligations. 

Pretending that letting the rupee slide is some sort of silver bullet that will take care of the larger rut that we are in, is reductive and simplistic. If we let the rupee go, but if we couple it with selective import restrictions, we can ensure lessened pressures on the dollar, so the rupee’s slide won’t be as sharp as it would be in what Atif Mian proposes.

Now let us turn our attention to someone who espouses neither Atif Mian’s point of view, nor the Miftah-ish strategy that I espoused above, And that is the man in the hot seat himself, the finance minister.

There is an attempt in the greater economic commentariat to draw Ishaq Dar like a stick figure with no shades, who has a near Freudian obsession with the value of the rupee, and he views any depreciation as some sort of affront to his honour. And that this is the sum total of his economic reasoning. That people seriously believe this is more funny than the caricature of Dar that is presented to us.

Economics is a science, yes, based on Karl Popper’s scientific method. But then there are also differences of opinion in science. But this isn’t even economics that we are talking about. This is public policy. Much like even a broken clock is correct twice a day, even seemingly ridiculous policy directives can have at least some redeeming features. And even the best of them can have some unintended consequences that can metastasize into something quite horrid.

All policies have costs. As Harry Truman famously said, “Give me a one-handed economist. All my economists say ‘on hand…’, then ‘but on the other…” There is no one right policy. 

Let us evaluate Dar from that angle:

We are a democracy, and politicians don’t play to a gallery of policy wonks on twitter. They don’t even play to the rest of twitter, for that matter. They look at the Average Joe, whose ends are getting tougher to meet every passing day. If there is a government in place that has significant political capital, this lot can bear some difficult-but-necessary decisions, but only to a point. After that, one cannot explain the nuances of international trade, of LCs and foreign exchange reserves when it comes to people who are finding it difficult to buy fuel and groceries.

If a deal with the IMF is to come through, and we hear that it just might, Dar finally letting go of the rupee would lead to a slide much smaller than it would have, had it been let go in the absence of the economic confidence that an IMF program brings with it.

The problem with Dar’s strategy is that it has taken way too long for the IMF to come and the current limbo to resolve.

Yes, Ishaq Dar’s particular brand of management has led things to this pass, but Atif Mian’s prescription would certainly have led to more inflation. And between the two of them, we know who the inflation hawk is: the politician, not the academic.