The present government had informed the nation last year that it would borrow Rs843 billion from banks during FY23 ending this month. But between July 1, 2022, and June 2, 2023 (28 days before the close of the year), the federal government has already borrowed Rs3.176 trillion from banks.

This not only crowded out the private sector and contributed to tanking of the economic growth from 6.1 per cent last year to an estimated 0.3pc this year but also played a role in pushing inflation to a half-century high of 38pc.

The State Bank of Pakistan continued pumping liquidity in the interbank market ahead of treasury bills and bond sales to ensure that banks had enough funds to lend to the government. This practice is inflationary as it contributes to growth in the money supply without any economic activity.

In Pakistan, parliamentary democracy, in which the parliament has the power to question the government is too weak. The earlier parliamentary democracy regains its true spirit, and the media gets its constitutionally guaranteed freedom, the better we can handle our current economic crisis.

The rupee will likely come under immense pressure in the first quarter of the next fiscal year if the IMF programme remains stalled

For that to happen, holding free and fair elections on time —sometime in October —is a must. Everything else will follow the course. But if elections are delayed, the current political polarisation will deepen and the economy will suffer irreparable loss.

That said, let’s look at some other indicators of the fiscal mess. For FY23, the government had projected Rs3.95tr spending on interest payments on domestic and external debts. Actual interest payments, however, devoured Rs3.582tr within three-quarters of FY23 and are expected to end up higher than Rs5.3tr at the end of the fiscal year on June 30.

This massive slippage in the budgetary target is due to genuine reasons, including interest rate hikes to contain inflation and the depreciation in the rupee value during the year. However, the parliamentary accountability for such slippages is nowhere to be seen.

For FY24, the projected spending under the head of interest payments is Rs7.303tr, and the tax revenue target is Rs9.2tr. In other words, about 80pc of the tax revenue would have to be spent on interest payments alone!

If a family earns Rs100,000 a month and pays Rs80,000 to creditors as interest, how on earth will it survive with the remaining Rs20,000? That’s the question facing Pakistan now. And if no emergency measures are taken, the amount of money spent on interest payments may continue to rise every year both in volume and as a percentage of total tax revenue. Will the state be able to function then?

No friendly country can continuously lend billions of dollars knowing full well that our capacity to service these loans is weakening day by day

The problem of the external sector is equally horrifying. In FY24, starting from July 1, Pakistan needs a little over $5.5bn for external debt payments each quarter, according to State Bank of Pakistan (SBP) Governor Jameel Ahmad. Where will the $5.5bn will come from, quarter after quarter?

Let’s assume the best-case scenario in which Pakistan’s exports and remittances together will be enough to finance imports. And for the argument’s sake, imagine that whatever little we may get in foreign investment will also match the forex outflows of the outward repatriation of funds by multinational companies operating in the country. But the external debt repayments requirement will remain in place.

Remember, no brotherly and friendly country can forever roll over the funds they have placed with the State Bank of Pakistan. Nor can they continuously lend billions of dollars to us, knowing full well that our capacity to service these loans is weakening day by day.

As of June 9, the SBP’s foreign exchange reserves stood at $4bn, enough to cover barely a month of goods’ imports bill. The rupee will likely come under immense pressure in the first quarter of the next fiscal year (July-September) if the International Monetary Fund (IMF) loan programme stalled in November 2022 is not revived.

Further drying up of forex reserves will only push the country closer to the possibility of a sovereign loan default. Pakistan will have to make alternative arrangements. Finance Minister Ishaq Dar is confident, however, that the country would meet its external debt servicing obligations with or without the IMF’s help.

Meanwhile, the IMF has raised several objections on the FY24 budget, further eclipsing the possibility of the revival of the IMF loan programme that is due to expire this month. One must hope that the ninth review of the loan programme is completed within days and Pakistan gets the last tranche of an old $6.5bn loan.

However, with every passing day, the differences between Pakistan and the IMF appear to widen. Finance Minister Ishaq Dar has now blamed “geopolitics” behind the delay in the revival of the IMF loan though he is still hopeful about its revival.

Many policymakers and academia think debt restructuring has become unavoidable for Pakistan. Eminent economist and former finance minister Dr Hafeez Pasha is among them. At the launching ceremony of his new book Leading Issues in the Economy of Pakistan, he revealed that the net forex reserves of Pakistan have plunged to negative $14bn, according to media reports.

These are tough times for Pakistan. The earlier the IMF funding line is reopened, the better it is. Because in the absence of it, filling in the next fiscal year’s $23bn external financing gap through “alternative means” will have long-lasting consequences for Pakistan.

Published in Dawn, The Business and Finance Weekly, June 19th, 2023