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Bourgeoning debt and fiscal woes

 Dr. Ikramul Haq & Abdul Rauf Shakoori

Questionable decisions of our rulers, judiciary and establishment have pushed the country into a precarious situation where discharge of domestic and foreign obligations poses formidable challenges. The sovereign debt levels of Pakistan have now assumed alarming proportions with foreign debts having reached US$ 126 billion as on December 31, 2022 and domestic debt and liabilities having jumped up to Rs. 34.857 trillion. These 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, trapped in a vicious debt trap, is forced to borrow more funds just for debt servicing. Reckless borrowing by successive governments has squeezed the fiscal space ousting required expenditure in areas like public welfare, education, health care and infrastructure.

The ever-increasing debt burden of Pakistan is not only subjecting the country to economic vulnerability, but is also eroding our capacity to absorb abrupt global financial shocks or natural calamities. The recent statistics, especially one related to foreign debt, portray an extremely dismal picture. The current foreign exchange reserves are not even sufficient to cover import bill for a month. January’s data released by State Bank of Pakistan show that debt servicing obligations with maturity up to one month is US$ 2.7 billion. With foreign reserves standing at a low of a little over US$ 3 billion, critically calls for immediate financial support from lenders and friendly countries. The government has managed a few rollovers from China, but main support from Saudi Arabia, United Arab Emirates and Qatar etc that helped in the past to discharge external debt obligations, is still 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 it to the country’s increasingly fragile liquidity and external account position that significantly raised default risks to a level consistent with a Caa3 rating. Release by rating agency notes: “In particular, the country’s foreign exchange reserves have fallen to extremely low levels, far lower than necessary to cover its imports 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 to cover the country’s immediate needs, weak governance and heightened social risks impede Pakistan’s ability to continually 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 also increased manifold due to persistent violations of commitments made with friendly states and the International Monetary Fund (IMF). Resultantly, resumption of the stalled Extended Fund Facility (EEF) programme is taking longer than expected.  

Staff level agreement with IMF is crucial to unlock substantial external financing by way of disbursement of next tranche. Unfortunately, the “friendly” as well as “brotherly” countries do not trust us anymore, and have linked their support with resumption of IMF’s programme. In case Pakistan fails to secure the trust of friendly states and that of IMF, it will not be able to meet its external financing needs for the next year and beyond. We cannot fulfil these merely by export inflows, remittances and Foreign Direct Investment (FDI) therefore, the successful completion of current EEF programme and new arrangements to meet post-June 2023 liabilities, are necessary for our economic survival.

Our engagement with IMF needs transparency and fulfilment of commitment in line with agreed terms. 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 as well as averting the risk of default. Needless to say, any deviation or further delay in complying with agreed terms of IMF would adversely affect our economic viability, increasing the risk of default.

The last four years of economic decisions have pushed us to a position where after managing external financing needs of the ongoing year, our liquidity and external position in next few years will continue to remain extremely vulnerable and fragile. On an average, the country’s external obligations per annum are around US$ 25.23 billion other than current account deficit. Based on IMF’s report, after including such figures, Pakistan’s average annual gross financing requirement in the next four years may rise to around US$ 37.5 billion.

We have yet not addressed fundamental challenges faced by the economy, stemming from sustained weak governance and perpetual political instability. The main and powerful players stand divided over capturing state power. Unfortunately, judiciary has become a new player in this race. Legal experts and civil society think that current political instability is partly due to certain controversial decisions of the judiciary. They further argue that the judiciary has overstepped on various occasions while interpreting the land’s supreme law.

Many believe that parliament should amend Article 209 of the Constitution to ensure an effective and transparent accountability. The self-accountability mechanisms, they claim, is not working, as despite numerous complaints, there is little action, no public disclosure or rules framed for streamlining the entire process. Similarly, the role of establishment remains obvious with interference in affairs exclusively related to the executive. Though the current leadership of the army claims to be refraining from indulging in political affairs, but this was not the position until last year.

In the existing scenario, politicians do not appear mature enough to resolve these issues. Even the popular leaders still believe that army would bail them out. Their only pastime remains mudslinging and/or levelling endless, mainly unfounded, allegations against each other. Resultantly, economic and public welfare matters are being continuously ignored shamelessly.

Ordinary households are facing the brunt of unprecedented inflation, which skyrocketed to 42.27% on year-on-year basis on March 9, 2023. It is historic high. Food inflation recorded at 45.07% and transport at 50.45% in February 2023. Miseries of the masses seem far from over as the expected impact from circular debt management and deteriorating value of rupee will become more profound in the coming months. Piling up of debt at domestic level must stop and emphasis should be placed 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 are utilised for welfare of public at large. We have already reached a point where all temporary measures have failed and available fiscal cushions, exhausted. Therefore, at this critical juncture, the rulers must realize that without enforcing financial discipline and removing inefficiencies, the goal of sustainable and resilient economy can never be achieved.


Dr. Ikramul Haq, Advocate Supreme Court and writer, is Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of the Pakistan Institute of Development Economics (PIDE). Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance. They have recently coauthored a book, Pakistan Tackling FATF: Challenges and Solutions with Huzaima Bukhari.    

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