Pakistan will head into 2023 with an incredibly gloomy economic outlook and troubles lurking around every corner.

In the outgoing year, the people came around to an unprecedented price growth amid the country’s consistently deteriorating balance of payments crisis exacerbated by devastating summer floods and ongoing political uncertainty.

Next year we could see inflation entrenched further and the economy trek toward a deeper recession as the politically embattled coalition led by the PML-N struggles to revive its sour relationship with the International Monetary Fund for the resumption of its loan programme to overcome its dollar liquidity crisis.

Even though the finance minister, Ishaq Dar, continues to stave off International Monetary Fund (IMF) pressure to further tighten government spending, raise electricity and gas prices, and impose additional taxes to avoid the political fallout of such decisions, analysts believe that he does not have many options.

With the central bank’s liquid foreign exchange reserves plunging to their eight-year low to just above $6 billion amid drying foreign inflows, concerns over the government’s capacity to timely make its foreign debt payments without an early restoration of the IMF funding programme are resurging on the delay in the disbursement of the new tranche of $1.2bn.

With no let-up in the present situation in sight, it is time people braced themselves for a tougher year ahead than the one they just endured

The lender has postponed the ninth performance review of the bailout, which was originally scheduled for the end of October on differences over Islamabad’s post-flood fiscal projections for the current financial year. Pakistan has twice renegotiated the programme with the IMF — first under Imran Khan and later under Shehbaz Sharif — in the last year but couldn’t sustain its continuity due to political compulsions.

The IMF programme is meant to stabilise the economy that has been in a tailspin for almost a year now, and to provide comfort to the other multilateral, bilateral and commercial creditors. The top three global credit rating agencies have already downgraded Pakistan’s ratings into junk territory because of its growing external vulnerabilities in recent months.

Pakistan’s home currency has weakened more than 27 per cent since the start of the year and hit its weakest level of almost 240 to a dollar at the end of July, reflecting the country’s fragile financial situation.

The default worries were entrenched first because of a delay in the restoration of the IMF loan programme, which was originally signed in the summer of 2019 but suspended multiple times since, and later when new tensions emerged between Islamabad and the lender over the unmet fiscal and other targets in the aftermath of catastrophic summer floods that submerged a third of the country, displaced millions, and caused economic and infrastructural losses of over $30bn.

Indeed, the country has suffered from extreme external shocks like any other developing nation heavily reliant on imports of oil, gas, food and other commodities. But its present troubles are homegrown. The perpetually recurring balance of payments crises have their roots in decades of fiscal profligacy of Pakistan’s ruling elite. When a country runs high deficits to boost domestic consumption to achieve growth, it always ends up with unsustainable current account imbalances.

The average fiscal deficit during the last four years has been 7.23pc of GDP, with the current account gap growing in tandem and hitting almost 5pc of GDP during the last financial year that ended on June 30. Political instability, high global commodity prices, destructive floods and drying foreign inflows have only sped up the rot that was already in the making.

With the country’s external financing needs during the present fiscal year estimated by the IMF at nearly $34bn, the flood losses, recessional global environment and hyperinflation have together made the challenge of economic revival tougher than ever.

The government claims that it expects increased financing from other multilateral and bilateral lenders, including friendly countries like Saudi Arabia, China and the United Arab Emirates. But it is not helping the jittery markets.

State Bank of Pakistan Governor Jameel Ahmed’s reassurances that Pakistan’s full-year financing requirements of $32-34bn were fully covered and that the reserves will start building up in the first half of 2023 are not helping calm the market and quash default speculations. No wonder Nomura, a top Japanese investment bank, has placed Pakistan among seven countries threatened by a currency crisis over the next 12 months.

With a formidable foe like Imran Khan out on the streets demanding early elections, it is natural for a weak coalition government to avoid tough decisions in an election year. In an interaction with a group of senior journalists last week, former prime minister Imran khan, who is recovering from the bullet injuries he had sustained in an attempt on his life, summed up the government’s predicament when he predicted that the country could slide into a default in January or February.

“The (present) regime led by the corrupt politicians is doomed whether or not it gets a bailout from the IMF,” he insisted. “If the IMF dollars don’t come, the country’s going to default on its debt payments because we don’t have dollar liquidity.

“On the other hand, if the IMF agrees to finance, the government will be forced to significantly increase the cost of electricity and gas in addition to raising additional taxes of Rs1.5 trillion. That will be a death knell for the economy and the industry that is already shutting down. Only a government with a clear, fresh public mandate can steer the economy out of its present crisis.”

There’s no doubt the government is clearly in a bind regarding how it should meet the multiple challenges facing it. With no let-up in the present situation in sight, it is time people braced themselves for a tougher year ahead than the one they just endured.

Published in Dawn, The Business and Finance Weekly, December 26th, 2022

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