PAKISTAN’S balance-of-payments troubles have spiralled into a full-blown economic crisis over the last several months. Amid stagnating growth and skyrocketing inflation, the crisis, exacerbated by sustained political conflict, has reached a point where it is threatening to destabilise the country as it faces the danger of sovereign default. The reasons are obvious.

Our ruling elites have borrowed heavily from just about everywhere to sustain their luxurious lifestyle for decades, without ever thinking that the world could one day stop financing or subsidising their extravagant ways.

The more immediate reason relates to the inability of our ruling classes to change their wasteful ways, despite warnings from our lenders and friends. It is not surprising that no one wants to fund us unless we make a strong commitment to implementing reforms and fixing our structural issues.

A report of the economic affairs ministry shows that Pakistan’s external financing pipeline is drying up. Multilateral, bilateral and commercial inflows (read: loans) went down by 38pc — or amount to just $8.1bn — in the first 10 months of the current fiscal year against over $13bn during the same period last year.

The amount is just 35.5pc of the $22.8bn full-year budget target for foreign financing. No wonder official foreign currency reserves have dwindled to $4.3bn as of last weekend — just enough to cover the bill of one month of controlled imports.

Former finance minister Miftah Ismail believes that the economic situation is going to be “very difficult” in the coming months, with liquid foreign exchange reserves likely to drop below the critical level of $2bn by the end of September.

With the IMF programme in limbo, because the Fund isn’t satisfied with Pakistan’s commitment to reform or its ability to arrange the required funds to meet external financing needs, our bilateral partners are also hesitant to step up. In such a scenario, with new elections expected in October, no one really knows where we will be — and in what condition — in the next few months.

According to IMF estimates, Pakistan will be required to make debt repayments or seek rollovers of nearly $75bn over the next three years. In order to repay its debt and avoid default, Pakistan must rapidly boost its earnings from exports, FDI and remittance inflows from overseas Pakistanis.

That is not going to happen overnight or without implementing key structural reforms to stabilise the economy. So Islamabad is left with only one option: take fresh loans and seek rollovers of existing foreign debt to stay afloat and avoid a formal default. That will not happen until the IMF programme is revived.

The alternative — debt restructuring — doesn’t sound pleasant in the current environment. In either case, we will have to first deal with the elephant in the room: political instability.

Published in Dawn, May 20th, 2023