Are we out of the woods?

On April 11, Mian Muhammad Shehbaz Sharif took oath as the 23rd Prime Minister of the Islamic Republic of Pakistan. On that fateful day, the State Bank of Pakistan (SBP) was left with liquid reserves of $10.5 billion, barely enough to cover seven weeks’ worth of imports. On that fateful day, Pakistan was 80 days away from a potentially disastrous default. Between April and end-June, Pakistan needed to pay out $4.9 billion. Between April and end-June, Pakistan was to incur a current account deficit of $4 billion. Never in Pakistan’s 75-year tumultuous history has Pakistan been a mere 80 days away from a default.

International investors, expecting a default, began selling bonds guaranteed by the Government of Pakistan with yields going up to 27 percent. The Pakistan Stock Exchange (PSX) lost some 3,500 points, a loss in capitalization of Rs800 billion, the equivalent of $4 billion. The Pakistani rupee lost Rs20 against the dollar.

On May 27, exactly 46 days after Shehbaz Sharif’s prime ministerial oath, Pakistan’s international bonds rallied, PSX gained 319 points and the rupee strengthened by Rs2.40 against the dollar. Congratulations PM Shehbaz Sharif, Pakistan has dodged a potentially disastrous default. Felicitations, Dr Miftah Ismail, Minister of Finance and Revenue.

On May 26, the government raised the prices of petroleum products by Rs30 per liter, a major step towards getting back into the IMF program. This increase in the price of petroleum products is bound to have three major consequences: the rate of inflation will go up further; the trade deficit will come down and so would the budget deficit.

Are we out of the woods? Absolutely not. The PTI-led government left behind a trade deficit of $125 million per day, every day of the year. That’s a trade deficit of $45 billion a year. The PTI-led government has left behind a current account deficit of $47 million per day, every day of the year. That’s a current account deficit of $17 billion a year. The SBP’s ‘predetermined drains on foreign currency assets’ are an additional $18 billion. That's a gross external financing need of $35 billion.

The twin-deficit of trade and budget, a PTI legacy, is a perfect recipe for disaster. In order to fill the gross external financing need we are going to need a lot more than just the IMF. We are going to need The World Bank, the Asian Development Bank, a new eurobond and further assistance from Saudi Arabia and China.

To be certain, taking on additional debt is not an economic growth strategy. More than anything else we desperately need an economic growth strategy-the sooner the better.