While the country is striving hard to gain a semblance of political stability, the economy continues to sink deeper into recession coupled with stagflation. Amidst all this, the fear is growing that the local currency might lose its value against the US dollar further in the coming weeks and months. As of now, there are not enough foreign exchange reserves with the State Bank of Pakistan to cover even two months of import bills for goods.

If, as expected, the SBP further liberalises import payments and outward remittances gathers pace, the demand for the dollar will rise, putting the rupee under more pressure. The situation will worsen further when in the coming month the external debt servicing will have to be financed without the IMF money. On the external front, the biggest problem is the import-export gap. During the first seven months of this fiscal year – July 2023 to Jan 2024 – Pakistan’s goods imports totalled $30.95bn, while exports were valued at only $17.78bn, leaving a trade deficit of $13.17bn.

It may be added here that the country’s total outstanding foreign debt and liabilities rose to $131.2bn in December 2023 from $128.6bn in December 2022. Pakistan’s external financing gap for the next two fiscal years is no less than $50bn, and closing this gap is not possible without the IMF. In the first six months of FY24, Pakistan spent $3.54bn on principal repayment of old foreign debts, and it also had to fork out an additional $2bn in interest payments. With the stock of foreign debt growing fast, Pakistan’s foreign exchange needs for external debt servicing may continue in the foreseeable future.

Recently the State Bank received $700 million from the IMF as part of the Fund’s ongoing Stand-by Arrangement of $3 billion. But last week, the international credit rating agency Fitch warned that uncertainty may hinder Pakistan’s efforts to conclude a deal with the Fund for securing further funding once the current bailout package expires next month. No doubt, the rating agency acknowledged that the country’s external position had improved, with the central bank’s reserves going up from $2.9bn on Feb 3, 2023 to $8bn on Feb 9, 2024. But it also warned that the increase was low relative to projected external funding needs, which will continue to exceed reserves for at least the next few years.

Needless to say, Pakistan’s unchecked spending and reliance on credit is not sustainable any more. We have accumulated a huge debt which is a direct result of a consumption-focused, import-based economy, without investment in productive sectors or industry. Successive governments have continued to spend carelessly to foster a VIP culture of expensive cars and lavish lifestyles. According to UNDP, the government provides subsidies of about 17 billion dollars to the elite classes comprising the civil and military bureaucracy, the feudal lords and the corporate sector.

On the other hand, the country’s industrial sector has continued to suffer under the heavy burden of rising input costs, high interest rates, creeping currency depreciation, energy sector woes and faulty trade policies.

In these circumstances, putting our economic house in order is going to be a tough challenge for the new government. To put the economy on the growth path, the government will have to take short and long term measures to revive industrial output and remove supply obstacles through targeted import liberalisation on the lines of the IMF prescription. Boosting exports should also be high on its priority list. To this end, it will have to control the ever-growing cost of energy and cut high interest rates.

Attracting foreign investment is another area where it will have to work hard. But much will depend on the materialisation of the promised foreign investment from the Gulf Cooperation Council (GCC) members and regular inflows of foreign investment from around the world with IMF support. It may be mentioned here that net foreign private investment, including foreign direct and portfolio investment, totalled just $933.5 million in the first six months of this fiscal year.

Though the amount is 49 per cent more than what was received last year, it is too low as compared with the large balance of payments deficit (BoP) which in the first half of this fiscal year stood at $3bn. The US, EU, and UK are also potentially big investors but they will wait for the right signal from the IMF. To this end it is important that the coming coalition government loses no time in initiating negotiations with the IMF and meeting its conditionalities without unnecessary ifs and buts.