The only way forward is to let the Executive work and restore financial viability of the state
he daunting challenges faced by Pakistan are pushing the country towards a dangerous fault line. Successive governments, civilian and military alike, have unremittingly failed to bridge the current account deficit by consolidating foreign exchange reserves to a desirable level to ensure self-reliance and sustainable growth.
An ill-advised embargo on imports, in place for several months, has massively disrupted, rather destroyed, the supply chain. Resultantly, many industries, especially small and medium enterprises (SMEs), have been left with no option, but to close their operations. Despite tall claims of better economic management and providing relief to industries and businesses, by successive governments in Pakistan, the economic situation on ground is precarious — to use a mild expression.
The focus of the present government, ever since Muhammad Ishaq Dar took charge as finance minister, has been to ensure timely payment of the country’s external financial obligations. It is indeed an uphill task as we need around $25 billion a year for debt-servicing. So far, the government has averted default on foreign payments.
The most recent data released by the State Bank of Pakistan (SBP) confirms that in the first nine months of the current fiscal year (July 2022 to March 2023), Pakistan made payments totaling $15.6 billion in external debt-servicing. This amount is 44 percent higher than $10.8 billion in the corresponding period last year. The principal serviced in this period is $12.63 billion and interest $3.02 billion.
Pakistan’s debt burden, particularly external debt, is going to be significant for several years. It is clear that unless we devise a sustainable plan, any hope of fiscal recovery will remain unrealistic. In order to remain solvent, the country needs to look for new avenues of funding and external financing although there has been significant reduction in the amounts of external debt-servicing on net basis from July to March 2023.
The situation at hand is a direct result of our disinclination, rather than a lack of capability, to introduce and implement structural reforms. While imports have contributed to our growth, exports never grew sufficiently to meet the increasing need for foreign exchange. Therefore, the trade gap has been historically bridged through borrowing.
Reluctance on the part of lenders to keep on funding our gaps on the external front has finally exposed us to a risk we had never witnessed in the past. Despite facing the grim economic realities, our actions and policies are falling short of meeting the severity of the situation.
The stalled Extended Fund Facility (EFF) programme of the International Monetary Fund (IMF), resumed in August-September 2022, came with a Memorandum of Economic and Financial Policies and a Technical Memorandum of Understanding that formed part of the letter of intent signed by the governor of the State Bank of Pakistan and the federal finance minister.
The programme resumed with an overall objective to restore fiscal discipline and debt sustainability. It revolved around ensuring and safeguarding monetary and financial stability and rebuilding external buffers. However, subsequently, Pakistan failed to calibrate with the lender on numerous goals and started falling back on various commitments. Resultantly, the ninth, tenth, and eleventh reviews, which were due in November 2022, February 2023 and May 2023, respectively, are still pending.
At this critical juncture, we are in dire need of foreign exchange to build our dwindling reserves. Continued delay in the IMF programme has cast serious doubts on the government’s ability to handle the current crisis. Though the current account deficit has tapered off significantly as a result of import containment, the overall balance of payments position remains dire.
The foreign exchange reserves are still low and little progress has been made towards completion of the pending reviews under the IMF’s EFF programme. Pakistan’s access to international capital markets remains restricted. Yet, the government is optimistic about settling its external obligations. However, given the circumscribed access to global markets and lenders, independent analysts fear that this approach will not be sustainable beyond the current fiscal year. Thus, besides completing the current EFF programme, we need a fresh lifeline from the IMF.
The confidence of the business community and global markets is fast diminishing. In the long run, this can push us into deeper crisis. The output of large-scale manufacturing industries decreased by 25 percent in March 2023 compared to March 2022. If the trend continues, it can trigger a new wave of unemployment and hamper tax collection targets.
To counter inflation, the SBP has been frequently revising the policy rate upwards. After the most recent raise, it has reached 21 percent. Still, core inflation in April 2023 rose to 36 percent and is expected to remain at this high level in the short term.
Recent strains on the supply chains caused by floods have rendered these macroeconomic measures inefficient. Apart from the natural catastrophe, political instability and the tug of war between state institutions have affected the economic situation.
Some improvement in the stock exchange’s KSE-100 index was observed recently but a country having a population of over 225 million people needs permanent and durable politico-economic stability for sustainable growth to address fiscal challenges and fulfill basic requirement of the citizens. This can only be achieved by improving accountability laws for public office holders.
The egotistic behavior of some individuals holding high public offices is a hurdle in the performance of their duties. Their interventions in the affairs of the Executive have not only weakened democratic dispensation but also contributed to the economic meltdown.
Those at the helm of affairs should realise that economic and political challenges are escalating and the risks of anarchy and threat to national security are increasing. Our parliamentarians should play their role and introduce and then implement legislation to ensure accountability of those who consider themselves above the law. Otherwise, the risks to our existence will remain exceptionally high. The only way forward is for everybody to act within their domains and let the Executive work and restore financial viability of the state.
Dr Ikramul Haq, an advocate of the Supreme Court, is adjunct faculty at Lahore University of Management Sciences (LUMS)
Abdul Rauf Shakoori is a corporate lawyer based in the USA