KARACHI: The economic situation is going to be “very difficult” in coming months, with liquid foreign exchange reserves of the central bank likely to drop below the critical level of $2 billion by the end of September, said former finance minister Miftah Ismail on Wednesday.

Addressing a meeting of businesspeople at the German consulate, the estranged PML-N leader who served two brief stints as finance minister said the ongoing economic crisis is “not like the old recessions we had”.

With the $7bn International Monetary Fund (IMF) loan programme in abeyance for months on end, the central bank’s liquid foreign exchange reserves have dropped to $4.4bn.

According to Mr Ismail, Pakistan has to pay $3.7bn in amortisation debt repayment and $400 million in interest payments within the next two months.

In other words, the outflow of dollars in terms of external loan-related payments amounts to $4.1bn while the total reserves of the State Bank of Pakistan (SBP) stand at only $4.4bn.

Of the $4.1bn figure, $1bn is a safe deposit from China, meaning it’s the money that the Chinese central bank has deposited with the SBP. China will likely re-roll it, bringing the total expected outflow to $3.1bn. Islamabad owes another $1.5bn to two Chinese banks, which may also re-roll the sum but the process will take time, he added.

“The Chinese have a different way of re-rolling loans. You write a cheque to them and they keep (the money) for a month and then they reroll,” he said.

“So by Oct 1, we’d probably have less than $2bn. How long we can survive after that, only Allah knows. Things will get very difficult for Pakistan temporarily,” he added.

Mr Ismail said domestic debt servicing is also getting out of control particularly with the interest rate climbing to unprecedented highs. He criticised fiscal practices of the provinces, which show little interest in raising revenues by taxing real estate, agriculture and services.

As a result, the provinces eat up Rs4.5 trillion out of the annual federal tax revenue of Rs7.5tr. Even if one adds Rs1.5tr that the federal government is supposed to collect in non-tax revenue, Islamabad will be left with just Rs4.5tr in its kitty. The sum isn’t even remotely sufficient to balance the fiscal account as the domestic debt servicing is touching Rs6tr a year.

“When you have to borrow money to pay interest, you’re in a debt trap,” he said.

Mr Ismail reiterated his demand that the country should create a province out of every division across the country to ensure that fiscal authority is devolved at the grassroots level. Referring to American economist Charles Tiebout’s assertion that people “vote with their feet” by moving away from cities and districts that offer suboptimal tax rates and public services, Mr Ismail said competition among three dozen provinces will bring a major improvement in governance.

Speaking on the occasion, German Consul General Dr Rüdiger Lotz said Pakistan needs political stability to fight the ongoing economic crisis.

“The incapacity of major players to come to an agreement is detrimental,” he said.

Published in Dawn, May 18th, 2023