What Next?

Despite being on the brink of economic default, Pakistan seems to have been plagued with a loss of direction along with feasible options to get its ailing economy back on track. The on-going economic nightmare is further exacerbated by a never-ending political stability coupled with the lack of sane voices emerging from either the government or the opposition. With rapidly depleting foreign reserves with absolutely no backup plan or economic roadmap at hand, the short-sighted makeshift arrangements will not provide any long-term relief. Although, the commitment of about $10 billion pledged during the donor conference in Geneva, a day-long moot in early January 2023 to raise funds to help rehabilitate and reconstruct the flood-hit areas of the country, may provide some sort of much-needed support to the balance of payments, Pakistan does need a long-term strategy to escape the perpetual crisis that leads to economic uncertainties every few years.

The net reserves with the State Bank of Pakistan (SBP) were at $5.6 billion at the end of December 2022. This has been steadily declining since the end of October 2022, when Pakistan received its previous tranche from the International Monetary Fund (IMF). When the incumbent government took power, the total reserves were valued at approximately $11billion. The current levels held by the SBP are at such alarming levels that several experts have questioned the ability of the government to meet its external debt obligations, raising concerns of a sovereign default. The lack of US dollars in the exchange rate market and the large premium offered on the purchase of US dollars is again due to economic uncertainty and the lack of foreign exchange reserves held by the SBP. A more freely floating currency is the need of the hour.

The current account deficit for the first five months of FY23, as reported by the SBP, is at $3.1 billion dollars. Although, this has declined from $7.2 billion reported in the same period previous fiscal year due to the restrictions on import payments imposed by the current government, the falling foreign exchange reserves continue to raise concerns. While import payments have decreased by approximately $5 billion from $29.7 billion to $24.9 billion in the first five months of FY23, exports have remained stagnant around the $12 billion mark. The trade deficit has decreased as a result of the restrictions on imports, falling from $17.4 billion in the first five months of FY22 to $12.8 billion in the first five months of FY23. SBP reports that export receipts have decreased by 2 percent and import payments have decreased by 16.2 percent year-on-year in the first five months of FY23. Comparatively, export receipts increased 28.8 percent and import payments increased 60.5 percent year-on-year in the same period previous fiscal year. This high growth rate in the previous fiscal year is likely due to the revival of the economy in 2021 as it recovered from the pandemic-induced shock in the first wave of COVID-19.