New government, old challenges

Dependence on coalition partners could weaken the government’s ability to formulate and implement cohesive policies

New government, old challenges


akistan continues to face longstanding challenges in meeting its external financing needs and sustaining foreign exchange reserves at acceptable levels. This has significantly hindered its potential for GDP growth. The country’s economic condition has been precarious, particularly since the last quarter of 2022, when the government’s adoption of contractionary measures resulted in suppression of GDP growth, which plummeted from 6.1 percent in fiscal year 2022 to a mere 0.3 percent in FY 2023. Concurrently, inflation has soared, reaching an alarming 29 percent in FY 23, further exacerbating economic instability.

The repercussions of the economic meltdown have persisted, as evidenced by the recent Monetary Policy Statement issued by the State Bank of Pakistan. It projects that inflation will hovering between 23 percent and 25 percent for FY 24. The forecast appears optimistic, given that the average consumer price index for the first seven months has been 28.73 percent. The persistent inflationary pressure not only challenges the country’s growth trajectory but also underscores the urgent need for comprehensive measures to address the underlying structural issues to restore and sustain economic stability.

Pakistan’s current engagement with the International Monetary Fund under its 9-month $3 billion standby arrangement remains steadfast, with expectations set for its successful culmination by March 2023, following completion of the second review. It is clear that a more substantial financial injection through another arrangement with the IMF will be necessary.

The recent review by the IMF, delving into sovereign risk and debt sustainability analysis, sheds light on critical aspects pertinent to Pakistan’s economic trajectory. This assessment can serve as a pivotal guidepost, offering insights into the country’s fiscal health and the measures needed to counter the challenges effectively. As stakeholders monitor these developments, prudent decisions and strategic actions are needed to steer Pakistan towards sustained economic stability and growth.

The IMF report aptly highlights that “the overall risk of sovereign stress is high, reflecting a high level of vulnerability from elevated debt and gross financing needs and low reserve buffers. Risks are mitigated by the fiscal adjustment safeguarded under the SBA and continuing onto medium term, financial commitments by bilateral partners and the banking system’s ability to rollover existing domestic debt.”

The IMF report indicates that Pakistan’s adherence to and consistent implementation of macroeconomic prudence outlined in the SBA can keep the debt trajectory in decline. While gross financing needs are projected to remain high, the pressure is expected to be mitigated by official bilateral and domestic financing mechanisms.

This analysis underscores the importance of sustained fiscal discipline and prudent economic management. As policymakers deliberate on strategies to address these challenges, a concerted effort towards fiscal responsibility is essential for long-term economic resilience and stability.

The recent review by the IMF, delving into sovereign risk and debt sustainability analysis, sheds light on critical aspects pertinent to Pakistan’s economic trajectory. This assessment can serve as a pivotal guidepost.

The projected gross financing requirements in FY 2024-25 stand at approximately $22.24 billion, factoring in an assumed current account deficit of around $5.6 billion. Consequently, it is imperative for the incoming government to leave no margin for error. Ensuring strict adherence to these targets is paramount. There is particular emphasis on maintaining a balanced current account. Successful management of these financial obligations is vital for fostering economic stability and bolstering investor confidence in Pakistan’s fiscal discipline.

The incoming government must leverage its financial and diplomatic channels, alongside other available resources, to improve its average time to maturity ratio, signifying the average time until debt repayment. The period from 2018 to 2022 witnessed imprudent borrowing resulting in high external debt as ATM plummeted to 6.2 years in FY 2022. This decline stemmed from significant borrowing through commercial avenues such as medium to long-term euro bonds and short-term bank loans, exacerbating the strain on Pakistan’s cash-starved economy.

Addressing this issue problem requires a multifaceted approach, encompassing strategic financial management, prudent borrowing strategies and diplomatic efforts to renegotiate terms. By extending the ATM, the government can alleviate immediate financial pressure and pave the way for sustainable economic growth. Additionally, fostering transparency and accountability in borrowing is essential to rebuild investor confidence and ensure utilisation of borrowed funds for projects that yield long-term benefits for economy and society.

Another critical challenge will be managing and controlling the fiscal deficit. Pakistan is caught in a vicious debt trap where it is borrowing money to pay back already borrowed money. Debt servicing currently takes lion’s share of the budget and the fiscal deficit is mounting. During the first six months of FY 24, the budget deficit rose to Rs 2.4 trillion or 2.3 percent of the GDP. (It had been Rs 980 billion or 0.9 percent of the GDP at the end of the first quarter).

The rapidly increasing fiscal deficit poses profound challenges to Pakistan’s economic stability and growth prospects. Effectively addressing this issue requires comprehensive fiscal reforms and prudent financial management strategies. Urgent measures are imperative to curtail excessive borrowing, streamline expenditure and enhance both tax and non-tax revenue.

Failure to rectify this trajectory risks further economic instability and impediments to sustainable development. Concerted efforts and decisive actions are imperative to steer the nation towards fiscal sustainability and prosperity.

Given that no single party secured a simple majority in the recent election, Pakistan is poised for a coalition government at the centre.

Dependence on coalition partners could weaken the government’s ability to formulate and implement cohesive policies, including but not limited to privatisation of loss-bearing commercial entities. This could result in a lack of initiative and a stagnant policies, further intensifying the economic challenges and hindering progress.

Additionally, the formulation of a robust foreign policy, crucial for steering the country towards prosperity, may also be compromised. While the formation of a coalition government is a democratic process, its ramifications on governance and policy efficacy cannot be overlooked.

Dr Ikramul Haq, an advocate of the Supreme Court and writer is adjunct faculty at Lahore University of Management Sciences.

Abdul Rauf Shakoori is a corporate lawyer based in the USA.

New government, old challenges