IT is no secret that Pakistan’s foreign exchange reserves have been on an accelerating downward glide path since hitting a peak in October 2016, as the current account deficit widens almost every month. What is still open to conjecture, however, is how much further this trajectory has to go before reaching its logical conclusion: the IMF. The government is assuring us that matters will never come to that since the depletion of the reserves is driven by the import of machinery which once installed will help reverse the tide. That explanation is cutting less and less ice with the passage of time for a variety of reasons. For one thing, empirically it can be demonstrated that the decline in reserves is due to more than just the import of machinery. For another, there is no indication that the machinery being imported will actually help boost the country’s foreign exchange earning capacity, and whether it will do so in time to avert a depletion of the reserves and the return to a balance-of-payments crisis that necessitates yet another international bailout. The debate outside government circles is not whether Pakistan will need a bailout at some point in the near future but when that moment will arrive.

With reserves now hovering around import cover barely sufficient for three months, every downward movement takes us towards the danger zone. In 2008, Pakistan went to the IMF with reserves sufficient for barely two months of imports, and in 2013 that figure was 1.7 months, according to World Bank data. As the declines pick up, it is worth bearing in mind that in both those years, Pakistan was perceived as a vital ally in the war against terrorism by the White House. That perception played a critical role in getting money disbursed quickly, and without most of the truly difficult preconditions that could accompany such a bailout in the absence of good ties in Washington. It would be a mistake to find comfort in the thought that we have other powerful friends now, who could be seen as providers of a bailout. Thus far, there is no indication whatsoever that China is in the business of underwriting macroeconomic stability in smaller countries, and that is unlikely to change in the near future. Pakistan’s external-sector weakness should not be ignored for much longer because it has ramifications far beyond macroeconomics.

Published in Dawn, September 6th, 2017