Pakistan’s economy is in a terrible bind today. With its own rising debt and inflationary pressure and the global economy facing the dire prospects of recession, there are few choices before the country’s economic managers.

Pakistan’s credit rating was recently downgraded by Moody’s rating agency which observed that the country’s ability to afford its own debt is “one of the weakest among the sovereigns” that the rating agency deals with. As it is, interest payments eat up half of government revenue. In September, Barclays Bank pointed out: “We estimate that Pakistan faces a funding gap of at least $6 billion in the fiscal year 2023 (FY23). Of the $15.5 billion in debt service obligations falling due in the fiscal year, $9.5 billion will be rolled over, since it was from official creditors, and a bond of $1.5 billion is earmarked in the latest budget. But refinancing plans for the remaining $4.5bn are not available”.

In view of the mounting debt burden, foreign creditors have warned of a default on a bond that is maturing in December. However, according to State Bank of Pakistan sources, Pakistan had commitments of up to $4 billion from multilateral creditors such as the Asian Development Bank, Asian Infrastructure Investment Bank, World Bank and the United Nations. But it remains to be seen whether these commitments are honoured.

Pakistan’s economic woes are worsened by the continuing turmoil in the global economy. The European Union (EU) is wracked by gas shortages and is now considering slapping price caps on the energy markets. On the other hand, Japan has decided to restart its nuclear reactors and build new nuclear power plants. This is due to the spiralling liquefied natural gas (LNG) prices in global markets. In the United Kingdom, the government is considering the possibility of loadshedding in the coming winter season.

Germany is also in the grip of a worsening energy crisis. All this has resulted from the Ukraine war due to which supplies to the West have been disrupted. The coming winter months are going to be very tough for the world as the Organisation of the Petroleum Exporting Countries (OPEC) has announced its decision to cut oil production by two million barrels per day, or two percent of total global supply.

Without doubt, petroleum imports are the Achilles’ heel of Pakistan’s economy.

Last year, petroleum products accounted for more than one quarter of the country’s total imports. This year, this percentage was expected to fall but it is unlikely to happen in the wake of the OPEC decision.

Rising interest rates in the advanced industrial economies as well as inflation stemming from the excessive monetary stimulus given to businesses in the wake of the Covid-19 pandemic lockdowns have also upset financial markets in the West with adverse impacts on the emerging markets. This has led to recession, dollar flight and pressures on the exchange rate. According to a recent study, 55 economies could see debt service payments rise to $69bn by 2024 from $61.5bn in 2022.

Pakistan is one of the worst victims of the global economic downturn. It is unsuccessfully wrestling with the severe pressure on its exchange rate. Starting from the year 2022 at 172 to a dollar, the rupee has touched two peaks – 240 in July and again in September, before falling to 220 last week.

All eyes are on Ishaq Dar to do the trick. But can he arrest the upward flight of the dollar, given the highly difficult economic conditions both at home and abroad. The flood disaster and International Monetary Fund conditions leave little room for maneuver. The government can avoid the default only at the cost of pushing the middle, lower-middle classes and the poor masses into extreme economic misery. On top of rising prices, electricity bills have gone beyond the paying capacity of all classes of people. The people will rebel if further tax burdens are put on them.

The only viable option in the given circumstances is the mobilization of indigenous resources. This can be done in the following ways. First, tax the rich and super rich who are sitting on piles of wealth illegally acquired. Also tax the landed aristocracy who live a luxurious life without paying their dues to the government. Another urgent need is to cut all subsidies to the pampered bureaucrats given in the form of free petrol, electricity and travel. Ministers and legislators’ royal perks and privileges should also be withdrawn which will save billions of rupees annually. Further, all inessential imports, including expensive cars, should be immediately banned. Last but not least, the government should launch a new drive to increase the volume of foreign remittances to at least 40 billion dollars annually from the existing 30 billion dollars.