FeaturedNationalVOLUME 18 ISSUE # 28

Flawed Policies and Diminishing Trust

Pakistan’s economy is currently facing a severe crisis marked by flawed policy decisions and a widening trust deficit with the government’s economic team. This situation has led to concerns over the implementation of policies, pending agreements, and the overall well-being of the country’s economy.

Finance Minister Ishaq Dar’s unwavering confidence in the face of mounting challenges has raised doubts among experts, who question the sustainability of the economy without essential support. The government’s economic team has further eroded public trust through the implementation of flawed policies, while the approval for the ninth review at the staff level remains pending. Ishaq Dar’s persistent show of confidence, asserting that Pakistan will stay financially stable regardless of the release of the IMF tranche, lacks support from the current unconventional policies or the prevailing macroeconomic indicators. It is crucial to hope for sound judgment to prevail, prompting the cabinet to reconsider its unwavering trust in an economic team that has previously inflicted significant damage on the economy and is presently causing immeasurable hardships for the general public.

Despite the negative indicators, Finance Minister Ishaq Dar has repeatedly presented an optimistic assessment of Pakistan’s economy, emphasizing that the country is not on the brink of a financial crisis and will definitely avoid defaulting. Additionally, the Finance Ministry submitted a written response to the National Assembly, revealing that as of 2022, the total domestic debt amounted to 4.77 trillion rupees, while the external debt stood at 4.56 trillion rupees. However, on the same day, the National Accounts Committee (NAC) held a session after multiple postponements caused by disagreements over crucial macroeconomic indicators. Disturbingly, the NAC further downgraded the growth rate for the current year from 0.8 percent to 0.29 percent, accompanied by an alarming 59-year high inflation rate of 36.4 percent.

Three key observations need to be made. The data on domestic and external debt pertains to the year 2022 and is likely calculated based on the average rupee-dollar exchange rate prevailing last year. However, since January 27, when Dar was compelled to abandon the disastrous policy of controlling the interbank rupee-dollar rate, the exchange rate has significantly worsened. This change occurred as a precondition for the start of negotiations on the ninth IMF review in February 2023. The total domestic debt in 2022 amounted to 28 trillion rupees, but it has now escalated to nearly 35 trillion rupees. This increase is primarily due to the incumbent government generating around 7 trillion rupees by selling treasury bills and Pakistan Investment Bonds to domestic commercial banks at very high interest rates. As a result, the discount rate has continued to rise, reaching the current level of 21 percent. These developments have crowded out borrowing opportunities for the private sector, negatively impacting domestic growth, unemployment levels, and inflation.

The current year has witnessed significant constraints on external debt, not as a deliberate government policy, but due to the failure to reach a staff-level agreement on the ninth review with the IMF. This failure has compromised the borrowing options from all other sources, including multilateral and bilateral institutions, as well as debt equity through Sukuk/Eurobonds issuance and borrowing from foreign commercial banks.

Furthermore, the comparative data is deeply concerning. Pakistan’s foreign exchange reserves held by the State Bank of Pakistan stood at 4,458.3 million dollars in April 2023, a sharp decline from 11,425 million dollars in March 2022. Additionally, private sector deposits in commercial banks dropped from nearly 6 billion dollars in March last year to around 5 billion dollars in April this year. While there is a consensus, both domestically and internationally, that Pakistan will meet its official debt repayments until the end of the current fiscal year, the absence of a staff-level agreement on the ninth review poses a real risk of official default. Concurrently, administrative measures restricting imports, including raw materials and semi-finished products, remain in effect, severely impacting the growth rate. The unintended consequence of limited foreign borrowing has resulted in a surplus current account.

However, denying the serious economic impasse the country is currently facing, with far-reaching consequences for poverty levels, unemployment, and inflation, will not make the problem disappear. Unfortunately, Finance Minister Ishaq Dar’s assessment of the economy, supported solely by his party leader Nawaz Sharif, comes at an increasing cost to the well-being of the general public. They are experiencing diminishing disposable income with each passing day, which, in turn, will have severe negative political implications.

Hence, it is imperative to recognize the alarming state of the economy at present, especially when comparing it to the previous year. This state is a direct consequence of flawed policy decisions made after September 2022. It is worth noting that the International Monetary Fund (IMF) disbursed the tranche in early September last year, combining the seventh and eighth reviews. This disbursement not only increased the loan amount but also extended the scheduled end until June of this year, indicating satisfaction with the fiscal and monetary policies that were being implemented at that time.

In conclusion, Pakistan’s economy is grappling with a deepening crisis fueled by flawed policy decisions and a lack of trust in the government’s economic team. The delayed staff-level agreement on the ninth review with the IMF further exacerbates the situation, posing a risk of official default and hampering the country’s borrowing options. The severe implications of these challenges are evident in the diminishing foreign exchange reserves, rising domestic debt, and adverse effects on growth, unemployment, and inflation. It is crucial for the government to acknowledge the gravity of the situation and reassess its economic policies in order to alleviate the hardships faced by the general public and restore stability to the economy.