Opinion – FM Asad Umar’s Exit !

Soon after the announcement that Asad Umar was given the task to manage Finance Ministry, it became apparent that the economy will take longer time to recover than it was earlier anticipated due to his inexperience and lack of expertise in the area. Within weeks market sensed difficult days ahead. It became very uncomfortable and jittery because of combined economic complications (Fiscal and Monetary). Had he been given Ministry of Commerce or Petroleum, AU would have performed well.

Asad gave a very surprising and awkward statement when (he in his Oct 19, 2018 address to FPCCI Karachi said he was targeting to bring down Cash to Deposit Ratio from 37% to 25% for credit creation of Rs 2 Trillion. This was huge one that went unchecked. He still has no idea about this statement. Someone should ask SBP Governor or Dr Ishrat Hussain to explain that if it is possible at all).

His removal after his brief stay as FM is arguably good reason to believe that the PM finally realized that he is not the right person for the tough FM’s job. During his 9-months stay in FinMin, he remained unsettled and his image as a Finance Minister was dented by the domestic political tremors. 

His role and his claims without evidence that he had fixed the economy are both very unconvincing, which is why he was replaced. The real cause of economic and domestic unrest/sufferings is because of badly thought out strategy to handle Fiscal issues and Managing of Monetary System.

It is important to understand the Global practice. On paper it is often claimed that the Global Central Banks are autonomous body, but in reality there is no such thing as Free Monetary System or complete Central Bank independence. Recently FED had to soften its Hawkish tone and do away with the higher interest rate policy stance after President Trump’s verbal call to FED to reconsider its aggressive tone. Similarly, in September 2016, former RBI Governor Raghuram Rajan resigned, though for various reasons, but one of the major reasons was that he did not oblige to governments call to give up his tighter policy stance and had to face severe criticism from the law makers.

In Pakistan, during last one year, Rupee too came under the guillotine of various operators, all supports to REER formula, with tall claims of sharp economic gains. So far neither Export has skyrocketed nor are measures taken to curb imports very encouraging. The truth it is narrowing of trade gap is because of slowdown of CPEC related activity and fall in oil prices.    

When PTI’s elected government came in power and Rupee against USD was stabilizing at 124 per US Dollar, SBP allowed two rounds of sharp depreciation of Rupee that has so far lost 14% of its value in 9-months.  

When Asad Umar and the PM Imran Khan were asked about sudden and sharp slide of Rupee, they said they are clueless and since SBP is autonomous its SBP’s prerogative to decide the value of exchange rate.

Agreed, but world’s financial managers and the governments do not behave like an Ostrich. If it was not intentional, then Asad Umar was for sure completely unaware of his authority. Under the SBP Act, Section 9B, apart from other responsibilities, it also demanded from the Finance Minister to chair the Monetary and Fiscal Policy Board and look at exchange rates excessive one sided move too that has certainly caused anguish for the PTI Government in terms of inflation & uncontrollable price hike.

Imagine, 9-months have passed and we are still talking to IMF, but he always was comfortable and pleased with the extreme measures taken by SBP to Depreciate Rupee and by Hiking Policy Rate, though inflation will never average above 7.5% by the FY end June 2019. He was never bothered or disturbed with the turbulent period that the government and the people were/are facing politically and financially. 

One must not forget or overlook that for any economy to prosper Central Bank’s function/role is that of equal partner and it is CB’s responsibility to play equally important role as a major participant at the time of choosing policy rules. This is because Central Bank is the major communicator and it is the CB’s monetary tool, which only after combining with the fiscal policies responds to the poor economic conditions or it demands to improve the performance. Hence, when in need, Central Bank always play active role to bring stability in the market.

Point to ponder is that inflation has been forcefully imported, obviously due to policy flaw. Normally economy responds in nearly 6-months period when Central Bank uses its monetary tool. Rupee was first depreciated in March 2018 by 4.5% to 115.4 per USD from 110.5 and since then in 13-months Rupee has been depreciated by 28% to 141.40.

While, SBP shifted its policy stance towards tightening that started from Jan 29, 2018 when it hiked its Policy Rate to 6% and since then in last 16-months it had Hiked Policy Rate by 7-times by 4.75% to 10.75% and interestingly it maintained its Refinancing Rate for the Customer to 6% since July 01, 2015 and yet success rate is Zero. Neither substantial weakening of Rupee saw sharp rise in Exports as claimed by Commerce Minister, nor Imports declined due to weak Rupee or hike in Policy Rate as claimed. Luckily narrowing of trade gap is caused due to CPEC activity slow down and in service sector and falling of oil prices. 

Whereas the cost of monetary measures to the exchequer during last 9-months will surpass Rs 4 Trillion by the end of fiscal year and yet Nation is dissatisfied and perplexed due to exorbitant price hike and yet there is no sign or hope of respite in the pipeline.

CONCLUSION

With the continuation of current Fiscal and Monetary Policy approach, the economy will never respond that demands drastic and aggressive calculated strategic measures.

It is thought provoking that all the blame is being put on Asad Umar’s shoulder. No one is questioning the role of Commerce Minister and PM’s strong 15-member Economic Advisory Council’s input. Interestingly PM Imran Khan has formed a 5-member advisory board to look into the “Economic Affair” probably to accommodate Jahangir Khan Tareen.  

My sane advice to Dr Hafeez Sheikh is to stretch beyond and go the extra mile. Avoid gathering of old friends, associates and colleagues as Finance Ministry is specialized area. Induct professionals to attain best result in our National interest as the country can no more afford “Economic Adventurism”.     

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction).