The latest IMF report on Pakistan’s economy needs to be read closely by the country’s economic managers in order to chart out their future course of action. According to the lender, Pakistan’s economy has achieved a degree of stability but there are serious risks to Islamabad’s debt sustainability and its ability to pay back foreign loans.

In its recently released staff report the Fund has appreciated the caretaker government‘s policy reform efforts, and given it credit for stabilizing the economy. The IMF also noted that the caretaker government has stayed in office beyond its constitutional period of 90 days due to issues relating to the re-demarcation of constituency boundaries on the basis of the latest 2023 census.

In the opinion of the IMF, Pakistan’s medium-term challenges remain acute which cannot be tackled effectively without a firm commitment to serious policy reforms. The IMF report has also highlighted governance and transparency risks emanating from the new Sovereign Wealth Fund and the Special Investment Facilitation Council. Of special concern is the rising financing needs which seem difficult to meet, given a weak reserve position, fiscal slippages, significant sovereign exposure of domestic banks and global economic crunch. All these factors combine to complicate the problem of debt sustainability. The overall risk of sovereign stress is also high, reflecting a high level of vulnerability from elevated debt and gross financing needs and low reserve buffers.

The lender has also highlighted that debt sustainability faces many medium term risks, including uneven program implementation and lack of access to adequate multilateral and bilateral financing. In other words, in the near future Pakistan will face difficulties in fulfilling its foreign payments obligations due to low foreign exchange reserves and scarce market financing. Further, delay in disbursement of planned financing from international financial institutions or bilateral partners could pose major risks to the government’s debt retirement programme. To quote the IMF, “Higher commodity prices and tighter global financial conditions, including due to the intensification of geopolitical conflicts, could put pressure on the exchange rate and external stability. Additionally, political tensions ahead of the upcoming elections may weigh on policy decisions and reform implementation”.

The economic outlook is further clouded by factors like a persistent current account deficit, a difficult external environment for Eurobond and Sukuk issuance, and limited reserve buffers in case of delays to anticipated inflows. As of now, the IMF total lending to Pakistan amounts to $8 billion which would increase to $9 billion by March this year. Pakistan will also have to line up a further $15-20 billion to make repayments in the coming fiscal year.

In the ultimate analysis, everything will depend upon how the economy performs, not on the inflow of external loans. On this score the two pieces of good news is that Pakistan’s economic growth may rebound by 2% in the ongoing fiscal year while tax collection could hit a record at Rs10 trillion. This would provide the government much needed fiscal space. Also, the central bank’s foreign exchange reserves have risen to $9.1 billion following the receipt of the International Monetary Fund’s (IMF) loan tranche of $700 million last week.

According to the caretaker finance minister, Pakistan would achieve 2-2.5% economic growth, supported by the agriculture sector growth of 5.6% in the wake of a turnaround in major crops, and the industrial sector expansion by 2.5%. Also, there has been significant improvement in the rupee-dollar parity in recent months. Shamshad Akhtar a few days ago expressed apprehensions about the current account balance. This is a sore point for Pakistan’s economy which has to be addressed quickly and effectively. The main issue is the ever widening trade gap caused by our stagnant exports. More foreign investment is one way to redress the imbalance but, as experts have repeatedly pointed out, the main hurdle in the way is the current environment of high costs of doing business and bureaucratic snarls that discourage investors. A bloated government structure is another problem.

Overall, there is a great need to cut the number of ministries to stop financial leakage and wastage of funds, bring down energy prices, and privatize loss making enterprises like the Steel Mills and the PIA. To boost revenue, the agriculture and retail sectors need to be brought into the tax net – an overdue reform neglected by successive governments in the past. Needless to say, we have to lift up the economy by our own efforts. The IMF and World Bank cannot provide long-term solutions to our problems.