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New government, tough old challenges

Dr. Ikramul Haq and Abdul Rauf Shakoori

Pakistan continues to face longstanding challenges in meeting its external financing needs and sustaining foreign exchange reserves at acceptable levels, significantly hindering its potential for GDP growth. The country’s economic condition has been precarious, particularly exacerbated since the last quarter of 2022, after the government’s adoption of contractionary measures resulting in suppressed GDP growth rate, plummeting from 6.1% in fiscal year (FY) 2022 to a mere 0.3% in FY 2023. Concurrently, inflation has soared, reaching an alarming 29% in FY 23, further exacerbating economic instability.

The repercussions of economic meltdown persist, as evidenced by the recent Monetary Policy Statement issued by the State Bank of Pakistan (SBP). It projects that inflation is to remain hovering between 23% to 25% for FY 24. However, this forecast appears optimistic, given that the average Consumer Price Index (CPI) rate for the first seven months stands at a staggering 28.73%. This persistent inflationary pressure not only challenges country’s growth trajectory but also underscores the urgent need for comprehensive measures to address underlying structural issues for restoring and sustaining economic stability.

Pakistan’s current engagement with the International Monetary Fund (IMF) under 9-month US$ 3 billion Standby Arrangement (SBA) remains steadfast, with expectations set for its successful culmination by March 2023, following completion of the second review. As Pakistan navigates its economic shape, it becomes increasingly apparent that another arrangement with the IMF will be necessary, potentially entailing a more substantial financial injection.

The recent review conducted by IMF, delving into the overarching vista of Sovereign Risk and Debt Sustainability Analysis, sheds light on critical aspects pertinent to Pakistan’s economic trajectory. This assessment serves as a pivotal guidepost, offering insights into the country’s fiscal health and the requisite measures needed to counter challenges effectively. As stakeholders monitor these developments, there arises a collective anticipation for prudent decisions and strategic actions 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 ability of the banking system to rollover existing domestic debt.”

However, the IMF report further indicates that Pakistan’s adherence to and consistent implementation of macroeconomic prudence outlined in the SBA will likely keep the debt trajectory in decline. While Gross Financing Needs are projected to remain high, they are expected to be mitigated by official bilateral and domestic financing mechanisms. This analysis underscores the importance of sustained fiscal discipline and prudent economic management to effectively combat economic woes. As policymakers deliberate on strategies to address these challenges, a concerted effort towards fiscal responsibility is deemed essential for long-term economic resilience and stability.

The projected Gross Financing Requirements for Pakistan in FY 2024-25 stand at approximately US$ 22.24 billion, factoring in an assumed current account deficit of around US$ 5.6 billion. Consequently, it is imperative for the incoming government to effectively unlock these financial commitments in a timely manner, leaving no margin for error. Ensuring strict adherence to these targets is paramount, with particular emphasis on maintaining a balanced current account within the designated range. The 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 actively leverage its financial and diplomatic channels, alongside other available resources, to enhance its Average Time to Maturity (ATM) ratio, signifying the average time until debt repayment. The period from 2018 to 2022 witnessed imprudent borrowing devoid of substantial underlying projects, resulting in Pakistan’s external debt with ATM plummeting to 6.2 years in FY 2022, below the targeted 7-year mark. This decline stemmed from significant borrowing through commercial avenues such as medium to long-term Eurobonds and short-term bank loans, exacerbating the strain on Pakistan’s cash-starved economy.

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

Another critical challenge would be managing and controlling the fiscal deficit that is getting higher with each passing day. Pakistan is practically caught in a vicious debt trap where it is borrowing money to pay back already borrowed money at high interest rates that debt servicing is taking lion’s share in the budget while fiscal deficit is continuously mounting. During first 6 months of FY 24, our budget deficit has skyrocketed to Rs. 2.4 trillion or 2.3% of GDP (which was Rs. 980 billion or 0.9% of GDP at the end of 1st Quarter).

An additional paramount hurdle lies in efficiently managing and mitigating the escalating fiscal deficit, an issue assuming alarming proportions. Pakistan finds itself ensnared in a pernicious debt cycle, where it is compelled to borrow further to service existing debts. The compounding effect of high interest rates is substantially burdening the national budget, with debt servicing consuming a significant portion of resources, continuously exacerbating the monstrous fiscal deficit. In the first half of the current fiscal year, Pakistan witnessed a huge surge in the budget deficit, soaring to R. 2.4 trillion or 2.3% of GDP, a stark contrast to Rs. 980 billion or 0.9% of GDP reported at the close of the first quarter.

The rapidly increasing fiscal deficit poses profound challenges to Pakistan’s economic stability and growth prospects. Effectively addressing this issue necessitates 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, to alleviate the burden of debt servicing. Failure to rectify this trajectory risks further economic instability and impediments to sustainable development. As Pakistan is grappling a fiscal quagmire, concerted efforts and decisive actions are imperative to steer the nation towards fiscal sustainability and prosperity.

Indeed, it is evident that Pakistan is poised to witness a coalition government at the center, given that no single party secured a simple majority in the recent elections. Anticipations suggest that the Pakistan Peoples Party and Pakistan Muslim League (Nawaz), alongside other coalition partners, will forge the government. However, given their diverse agendas and priorities, the government’s decision-making process is likely to be hindered, compounded by the need for consensus among coalition partners. This collaborative approach may not only slow down decision-making but also impede effective governance.

Reliance on coalition partners could weaken the government’s ability to formulate and implement cohesive policies, including essential reforms, including but not limited to privatization of loss-bearing commercial government-owned entities. This could result in a lack of proactive initiatives and a stagnant policy model, further intensifying existing economic challenges and hindering progress. Additionally, the formulation of a robust foreign policy, crucial for steering the country towards prosperity, may also be compromised. Hence, while the formation of a coalition government reflects a democratic process, its potential ramifications on governance and policy efficacy cannot be overlooked.


Dr. Ikramul Haq, an advocate of the Supreme Court and writer is an adjunct faculty at Lahore University of Management Sciences (LUMS). Abdul Rauf Shakoori is a corporate lawyer based in the USA.

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