Burgeoning debt and fiscal woes

Engagement with the IMF needs transparency and fulfillment of our commitment

Burgeoning debt and fiscal woes


ome questionable decisions taken by our political leaders, the judiciary and the establishment have pushed the country into a precarious situation where discharging the domestic and foreign obligations of the state poses formidable challenges. The sovereign debts have assumed alarming proportions. The foreign debt reached $126 billion on December 31, 2022, and the domestic debt and liabilities Rs 34.857 trillion.

The monstrous debt levels are now consuming an overwhelming portion of the state’s revenues. Corresponding economic impacts are now unfolding into a crisis where the government, caught in a vicious debt trap, is forced to borrow large amounts for debt-servicing. Reckless borrowing by successive governments has squeezed the fiscal space, ousting expenditure in areas like public welfare, education, healthcare and infrastructure.

The ever-increasing debt burden of Pakistan is not only subjecting the country to economic vulnerability, but is also eroding its capacity to absorb global financial shocks and natural calamities. The recent statistics, especially those related to foreign debt, paint an extremely dismal picture.

The foreign exchange reserves are not even sufficient to cover the import bill for a month. January’s data released by the State Bank of Pakistan shows that debt-servicing obligations with maturity up to one month is $2.7 billion. With foreign reserves at a low of a little over $3 billion, the situation calls for immediate financial support from lenders.

The government has received a few rollovers from China. Support from Saudi Arabia, the United Arab Emirates and Qatar, etc, is awaited.

This factor has caused various credit agencies to lower our rating. Recently, Moody’s Investors Service downgraded our debt ratings to Caa3 from Caa1. It attributed the decision to the country’s increasingly fragile liquidity and external account position that significantly raised default risks to a level consistent with a Caa3 rating.

The rating agency notes: “In particular, the country’s foreign exchange reserves have fallen to extremely low levels, far lower than necessary to cover its import needs and external debt obligations over the immediate and medium term. Although the government is implementing some tax measures to meet the conditions of the IMF programme and a disbursement by the IMF may help cover the country’s immediate needs, weak governance and heightened social risks impede Pakistan’s ability to continue to implement the range of policies that would secure large amounts of financing and decisively mitigate risks to the balance of payments.”

Our economic difficulties have increased manifold due to persistent violations of commitments made in dealing with friendly states and the International Monetary Fund (IMF). Resultantly, the resumption of the stalled Extended Fund Facility (EFF) programme is taking longer than was expected.

A staff level agreement with the IMF is crucial to unlocking substantial external financing by way of disbursement of the next tranche. Unfortunately, the ‘friendly’ and ‘brotherly’ countries no longer trust our governments and have linked their support to the resumption of the IMF programme. If Pakistan fails to secure the trust of friendly states and the IMF, it will not be able to meet its external financing needs for the next year and beyond.

A staff level agreement with the IMF is crucial to unlock substantial external financing by way of disbursement of the next tranche. Unfortunately, the ‘friendly’ and ‘brotherly’ countries no longer trust our governments.

We cannot meet these needs merely by export inflows, remittances and Foreign Direct Investment (FDI). Therefore, a successful completion of the current EFF programme and new arrangements to meet post-June 2023 liabilities are necessary.

Our engagement with the IMF needs transparency and fulfillment of past commitments. This alone can ensure support of the lender and other multilateral and bilateral collaborates/ partners for raising our foreign exchange reserves to substantial levels required for meeting fiscal needs and averting the risk of default. Needless to say, any deviation or further delay in complying with agreed terms would adversely affect our economic viability and raise the risk of default.

The economic decisions made over the last four years have pushed us to a position where after managing external financing needs of the ongoing year, our liquidity and external position will continue to remain vulnerable and fragile.

On an average, the country’s external obligations per annum are around $25.23 billion other than the current account deficit. Based on the IMF’s report, after including such figures, Pakistan’s average annual gross financing requirement in the next four years may rise to around $37.5 billion.

We have yet to address fundamental challenges faced by the economy, stemming from weak governance and perpetual political instability. The main players stand divided. Unfortunately, the Judiciary has become a new player. It has been alleged that the current political instability is due in part to certain controversial decisions of the courts. The courts are accused of overstepping their mandate and misinterpreting the supreme law.

It has been proposed that the parliament should amend Article 209 of the constitution to ensure effective and transparent accountability. The self-accountability mechanisms, they argue, are not working.

The politicians do not appear mature enough to resolve these issues. Some of the popular leaders still believe that the military can bail them out.

Ordinary households are facing the brunt of unprecedented inflation, which reached 42.27 percent on a year-on-year basis on March 9. It is a historic high. Food inflation recorded at 45.07 percent and transport at 50.45 percent in February 2023. Miseries of the masses seem far from over as the expected impact from circular debt management and the deteriorating value of rupee will become more profound over the coming months. Piling up of debt at the domestic level must stop. The emphasis should be on exploring new avenues for tax generation.

The government must simultaneously focus on capacity building of the inefficient state-owned enterprises. These should either be transformed or offloaded so that scarce resources available with the government can be utilised for the welfare of the public at large. We have already reached a point where all ad hoc measures have failed and the fiscal cushion has been exhausted.

Dr Ikramul Haq, an advocate of Supreme Court and writer, is adjunct faculty at Lahore University of Management Sciences (LUMS)

Abdul Rauf Shakoori is a corporate lawyer based in the USA

Burgeoning debt and fiscal woes