Pakistan’s external economy is plagued primarily with two structural problems. First, a high level of public external debt and second, overreliance on further external borrowings that not only increase the external debt stocks but also push the future cost of debt servicing. All other issues are ramifications of these two conundrums.

Our fragile and malleable democracy makes it too difficult for politicians to take the nation on board and find sustainable solutions to these problems of the external economy. A focus on short-term solutions prevail, and the government of the day, with varying levels of support from the military establishment, try to fix the balance of payments problems, often with the help of the International Monetary Fund (IMF) and friendly countries.

The role of the IMF has always remained a subject of intense debate revolving around the desirability for and efficacy of its prescriptions for the ailing economy. According to the State Bank of Pakistan, our public external debt and total external debt stood at $99.7 billion and $131.6bn, respectively, at the end of December last year.

The irony is that the IMF continues to prescribe reforms that provide temporary relief from the balance of payments problems, but do not enable Pakistan to ensure sustainable cuts in external debts in the medium to long term. The Fund’s programmes also do not put Pakistan’s economy on a high-growth trajectory for the medium to long term.

Focusing on IMF-enabled short-term respite remains top-priority instead of long-term, sustainable solutions

This, coupled with all kinds of weaknesses in our political/judicial systems, including the intervention of ‘the establishment’ has been hampering sustainable, strong economic growth for many years. In the absence of this growth, our reliance on external borrowing remains intact and the IMF’s requirements take centre stage in economic policymaking.

Keeping this in mind, it doesn’t come as a surprise for most Pakistanis that the IMF now wants to peruse Pakistan’s budget strategy before its approval from the federal cabinet. This was inevitable and, according to credible media reports, the inevitable has happened now.

During this fiscal year, ending on June 30, Pakistan has apparently overcome the balance of payments crisis thanks to a $3bn IMF loan augmented by crucial rollovers of previous loans of Saudi Arabia and China. For the next fiscal year, the IMF’s initial projection of the external financing gap is $22bn. Closing this gap isn’t easy if Pakistan doesn’t remain under the IMF’s umbrella reforms programme.

Exactly why the country is desperately seeking $6bn-$8bn IMF funding for three years, and that’s why the government’s priority is to maintain a good relationship with the Fund. If that means discussing the budget strategy with the IMF, so be it.

Pakistan has four major demands on its foreign exchange: Imports, external debt servicing, repatriation of profits and dividends earned by foreign companies and foreign investors in Pakistan — and financing of foreign education, health and travel expenses of Pakistanis.

The country also has four major sources of forex inflows, ie exports, remittances, foreign direct and portfolio investments, and funding from international financial institutions and friendly countries.

Being under the umbrella of the Fund programme signals to global investors the perceived safety of their capital

Being under the umbrella of the IMF programme signals to global investors the perceived safety of their capital and helps us attract foreign investment and even state funding from friendly countries. It also helps our exporters reach out to foreign markets with relative ease. So, securing IMF funding as soon as possible is a must, and that’s what the government is trying to do.

But exports and remittances, being non-debt creating forex inflows, have primacy and that too is being respected. The problem, however, is that with back-breaking cost-push inflation still above 17pc the corporate sector finds it too hard to boost exports of goods within a year or two.

But taking services exports, particularly information technology (IT) and IT-enabled services (ITeS) exports, to higher levels rapidly is possible. That is where Pakistani policymakers should continue doubling up their present efforts. Similarly, tapping the full potential of remittances is important. On both fronts, the government is making some efforts but those are too small to make a big change in near future. So far, the situation is less promising and outright is bleak.

During nine months of this fiscal year (July 2023 to March 2024), exports of services fetched $5.8bn — showing a year-on-year increase of less than 1pc, according to the Pakistan Bureau of Statistics. During the same period, imports of services consumed $7.5bn, leaving a services trade deficit of $1.7bn.

Experience has shown time and again boosting services exports without allowing enough rise in imports is just not possible, at least for the time being. A drastic policy overhaul is in order. During these nine months, remittances also grew from less than 1pc to $21bn, according to the State Bank of Pakistan.

On the other hand, Pakistan’s goods trade deficit during 10 months (July 2023-April 2024) totalled $19.5bn despite all import restrictions, many of which may go after the IMF offers a new loan. Then, the goods trade deficit would be equal to remittances, leaving the services trade deficit to be financed from borrowed foreign funds.

Pakistan can avoid this situation by promoting services exports, particularly IT and ITeS exports if it collaborates meaningfully with global IT giants like Google with the stated objective that IT and ITeS exports’ growth must overtake imports growth within a year or so.

It can also address the issue of goods export growth with the IMF with a clear request presented with enough rationale that the Fund should let Pakistan’s import curbs continue for some time. The task is easier said than done, but optimism and grit often make miracles.

Published in Dawn, The Business and Finance Weekly, May 13th, 2024

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