KARACHI: Economists and financial experts have called for quick action to fix the economic woes of the country amid depleting foreign exchange reserves, rapid currency depreciation and widening trade deficit.
The country’s macroeconomic indicators are painting a dismal picture, with the national currency hitting another historic low against the US dollar.
Pakistan has also witnessed the highest trade deficit of $39.26 billion in the first ten months of the current fiscal year (FY22). Apart from that, its current account deficit has reached $13 billion while its foreign reserves stand at $10.49 billion.
According to official statistics, inflation was also recorded at 13.4 percent in the month of April.
All these factors have created concerns the country may not be able to pay its debts in the coming months.
“There is complete confusion at the economic front and no one is paying attention, so the possibility of default can’t be ruled out,” Dr. Salman Shah, former finance minister, told Arab News. “Your economy is not strong enough to withstand local and international impacts including high commodities rates.”
“If the situation is managed in a better manner, including the prompt implementation of prior actions of the International Monetary Fund, then I think the country could be saved [from default],” he added. “The situation started worsening after the no confidence move was tabled in the end of March 2022 and the downfall still goes on.”
Default is a failure of any sovereign government to honor some or all of its debt obligations toward its creditors that mainly happens due to political instability and financial mismanagement.
The debt default entails severe economic repercussions since the country finds it difficult to borrow again and can be asked to pay higher interest rates. The situation can also lead to higher inflation and widespread unemployment.
Some economists said the country could avert the chances of default by securing external financing.
“Pakistan has passed through this [default] stage many times in the past, but it has never materialized due to negotiations with donors and the IMF,” Dr. Kaiser Bengali, senior economist and former head of Balochistan Chief Minister’s Policy Reform Unit, told Arab News.
“This time also the situation depends on talks [with the IMF],” he added. “If the parleys fail, the country will default.”
Pakistan has to make $20 billion external debt repayments during the next fiscal year, including $7 billion Chinese and Saudi deposits that are expected to be rolled over. However, currently major inflows, including from the IMF, are uncertain due to lack of progress on talks with the fund.
Pakistan and the IMF have been negotiating for the completion of the seventh review under a $6 billion loan program. Successful negotiations between the two will get the country another $1 billion tranche and help unlock more funding from multilateral donors.
“The first step should now be to take immediate action to implement IMF’s prior actions, including the removal of fuel subsidies, to get the country out of the current crisis,” Dr. Shah said.
Economists also suggested strategies to improve the worsening state of economy, including restrictions on burgeoning imports that fuel currency depreciation and inflation.
“The current rise in inflation is a reflection of overall economic imbalances, unproductive and faulty processes, and a lack of modern tools used for cultivation and manufacturing etc.,” Dr. Ikram ul Haq, a Lahore-based economist, said. “It also signifies flawed tax policies along high costs of production in which energy plays a major part.”
“To bridge the current account deficit, the government needs to cut unnecessary imports and raise money by relying on exports,” he continued.
He also emphasized the importance of increasing remittances, saying the government should “seek investment from expatriates by introducing viable projects yielding quarterly dividends while asking friendly countries for investment, instead of loans.” He added it was also possible to launch long-term sovereign bonds “as the last resort.”
He also recommended reduction in the discount rate to 10 percent in the next monetary policy while arguing in favor of bringing it further down to seven percent until the end of 2022.
“A one percent decrease in discount rate will reduce interest payment in the budget by Rs200 billion,” he said. “A one percent decrease in discount rate will reduce inflation by 1.3 percent.”
He maintained that inflation was caused by many factors, adding it was not possible to provide relief to the masses until all these variables were addressed in a holistic manner.
“Piecemeal firefighting approach without structural reforms will never succeed,” he continued.
Pakistani economists also said the current situation was caused by financial mismanagement and lack of a proper future policy direction.