The economic crisis Pakistan is facing today is unprecedented in its history. Foreign exchange reserves touched their lowest point in the last couple of decades, while inflation is at its highest level. On the other hand, the rupee is continuously losing value against the dollar. The uncertainty about IMF financing has shattered business and consumer confidence.

The root of the economic crisis is Pakistan’s inability to finance its external debt payments. Exports are less than half the total value of imports. The result is an ever-widening trade deficit which is financed through external debt. So the government has to rely on worker remittances and financial support from multilateral and bilateral donors as well as commercial lenders for survival.

Pakistan is perpetually facing a balance-of-payments crisis. The current account imbalance results from the fact that we spend more dollars than we earn and this puts pressure on the forex reserves. So we go to lenders to bail us out. Pakistan’s total public external debt — including government external debt, loans from the IMF and foreign exchange liabilities — stood at $52 billion in March 2010 and increased to $60 billion in March 2016. Since then, it rose sharply to $102 billion in December 2021, more than doubling from the December 2013 level. With the government paying off some of its external debt in recent months, the amount of total public external debt decreased slightly to $97.5 billion in December 2022. The government’s external debt in December 2022 was approximately $79 billion. As Pakistan relies heavily on multilateral donors to finance its way out of its recurring balance-of-payments crisis, this figure is likely to increase with new disbursements from the IMF.

According to the latest figures released by the State Bank, Pakistan’s imports declined by 28.44 percent during the first ten months (July-April) of the current fiscal year 2022-23 – from $ 65.519 billion last year to $ 46.887 billion during the current year. The country’s exports during July-April (2022-23) have been recorded at $ 23.174 billion against $ 26.247 billion in July-April of 2021-22, showing a decline of 11.71 percent. The Large Scale Manufacturing Industry (LSMI) output declined by 8.11 percent during July-March 2022-23 year-on-year.

The Finance Ministry, in its monthly economic update, has noted that the Federal Board of Revenue’s tax collection increased by 16.1 percent during July-April (2022-23); however, it remained below the target. The slowdown in economic activity mainly caused by import restrictions is a major reason behind a significant lower-than-expected tax revenue collection during the period under review. The ministry further stated that collection from customs duty declined by five percent primarily because of a decline in imports due to the import restriction policy.

Apart from import suppression, there are many other factors that have caused negative economic growth. High interest rates of over 21% and the rupee slide are among the major reasons. These have made our exports uncompetitive in the international market. There are other factors such as withdrawal of subsidies and unprecedented hikes in administered prices of petroleum products, gas and electricity tariffs. On the other hand, inflation shrunk the consumer base and shook the investors’ confidence. The Ministry of Finance’s monthly economic outlook has stated that inflationary pressures will continue and inflation may remain in the range of 34-36% amidst tough economic conditions.

The downside risks include supply disruptions, shortages of essential goods and synchronized policies and their impact on the LSM output in the coming months. The sluggish growth is primarily attributed to curbs on imports that led to the closure of factories and shortage of goods. The economic outlook in the near future is gloomy. The debt repayment obligations, growing interests on loans and a downward trend in revenue generation are factors that have to be taken into account.

The question is: What is the way out?

Some long overdue remedies must be put into action now. Pakistan has ignored structural reforms, fiscal discipline and good governance for years. There is too much waste in government expenditures and official perks and privileges are extraordinary. No long-term plan has been made for industrial growth and export expansion. It is time to encourage small and medium industries which better withstand internal and external shocks. Equally important is the need to win foreign investors’ confidence. Without fiscal competence and discipline and improved governance, we cannot rescue the economy from its present morbid state.