Pakistan’s economy has long been in the grips of financial instability, characterised by a rising debt burden and frequent recourse to external financing.

The recent statement by Finance Minister Muhammad Aurangzeb underscores the urgency of the situation, as he highlighted the anticipated rollover of loans from friendly countries and ongoing negotiations with the International Monetary Fund (IMF) for a new Extended Fund Facility (EFF). This situation raises critical questions about Pakistan’s financial future and the sustainability of its economic policies.

The reliance on short-term loans and debt rollovers from countries like China, Saudi Arabia, and the United Arab Emirates has become a recurring theme in Pakistan’s economic narrative. These rollovers provide temporary relief but do not address the underlying structural weaknesses in the economy. The frequent need for such financial support reflects the country’s inability to generate sufficient domestic revenue or attract sustainable foreign investment.

The much-anticipated $7 billion bailout package from the IMF has faced further delays. The IMF’s Executive Board did not include Pakistan’s request in its latest meeting schedule, citing the country’s failure to secure a timely rollover of $12bn in loans from friendly countries. This delay exacerbates Pakistan’s precarious financial position, as the country faces significant external payments due this year.

The Pakistani government has unveiled a borrowing plan of Rs32 trillion for the fiscal year 2024-25. This plan is heavily dependent on the approval of the IMF loan and the rollover of debt from friendly countries, particularly China. The borrowing is essential to finance the budget deficit and repay maturing debt, reflecting the country’s dire fiscal situation.

The country must balance its Fund-fueled short-term economic growth plans with long-term sustainable plans to create a debt-free economy

Even if Pakistan reaches a staff-level agreement with the IMF for a new $7bn loan, this agreement will come with stringent conditions, including phasing out incentives for Special Economic Zones, reducing subsidies, and implementing anti-corruption reforms. These measures aim to stabilise Pakistan’s economy but have raised concerns about their impact on growth and social stability.

The ongoing reliance on the Fund’s loans has drawn criticism for exacerbating Pakistan’s debt crisis. Critics argue that the IMF’s conditions, focused on fiscal austerity and regressive taxation, have deepened poverty and inequality in the country. Despite temporary economic stabilisation, these measures are seen as unsustainable, potentially pushing Pakistan further into a debt trap.

In such worrisome situations, Pakistan needs to take immediate measures for short-term solutions. The first short-term measure is the rollover of existing loans. As Finance Minister Aurangzeb mentioned, the rollover of loans from friendly countries is crucial in the immediate term. However, this approach is not without risks, as it merely postpones the repayment burden without addressing the root causes of the debt crisis.

Another short-term measure is negotiating favourable terms with the IMF. Pakistan must continue its discussions to secure the EFF on terms that balance fiscal consolidation with economic growth. Negotiating for a more extended repayment period, lower interest rates, and flexibility in reform timelines could help mitigate the negative economic impact while ensuring compliance with the Fund’s conditions.

Exchange rate management is also required as a key short-term measure. Stabilising the Pakistani rupee should be a priority to prevent further erosion of foreign exchange reserves. A combination of market-based interventions and prudent monetary policy can help achieve this goal, thereby reducing the cost of external debt servicing.

In addition to the short-term measures, Pakistan also needs to focus on the long-term measures. The first and foremost essential measure is structural reforms. Pakistan’s long-term economic stability depends upon the implementation of deep structural reforms.

These should include tax reforms to broaden the revenue base, reduce dependence on indirect taxes, and improve tax compliance. Additionally, reforms in the energy sector, public enterprises, and the agricultural sector are essential to enhance productivity and reduce fiscal deficits.

Pakistan also needs export diversification in the long run as Pakistan’s export base is narrow, relying heavily on textiles and a few other sectors. Diversifying exports by promoting value-added industries, investing in technology, and enhancing trade relations with emerging markets can help reduce the trade deficit and build foreign exchange reserves.

We also need to encourage foreign direct investment (FDI). Attracting FDI is vital for economic growth and reducing dependence on external borrowing. Pakistan needs to improve its investment climate by ensuring political stability, enhancing infrastructure, and streamlining regulatory processes, which are all long-term measures.

Last but not least, strengthening institutions is also a pivotal measure. Building strong, transparent institutions is critical for long-term economic stability. Anti-corruption measures, judicial reforms, and improvements in governance will not only enhance investor confidence but also ensure that public resources are used efficiently.

By focusing on broadening its revenue base, diversifying exports, and attracting sustainable investment, Pakistan can chart a path towards financial independence and long-term economic growth.

The writer is a Pakistani economist based in Saudi Arabia.
X: @moheyuddin.

Published in Dawn, The Business and Finance Weekly, September 2nd, 2024

Follow Dawn Business on Twitter, LinkedIn, Instagram and Facebook for insights on business, finance and tech from Pakistan and across the world.

Opinion

Editorial

Palestine MPC
Updated 09 Oct, 2024

Palestine MPC

It's a matter of concern that PTI did not attend the Palestine MPC. Political differences should be put aside when showing solidarity with Palestine.
A welcome reform
09 Oct, 2024

A welcome reform

THE Punjab government’s decision to abolish the corruption-ridden and inefficient food department, and replace it...
Water paradox
09 Oct, 2024

Water paradox

A FULLY fledged water crisis is unfolding across the world, with 2023 recorded as the driest year for rivers in over...
Terrorism upsurge
Updated 08 Oct, 2024

Terrorism upsurge

The state cannot afford major security lapses. It may well be that the Chinese nationals were targeted to sabotage SCO event.
Ban hammer
08 Oct, 2024

Ban hammer

THE decision to ban the PTM under the Anti-Terrorism Act is yet another ill-advised move by the state. Although the...
Water tensions
08 Oct, 2024

Water tensions

THE unresolved tensions over Indus water distribution under the 1991 Water Apportionment Accord demand a revision of...