Tipping point

The country is standing at a critical tipping point and it’s most important decision making centre is in complete disarray. The economy is still drifting towards crisis, although it is still possible to avert this outcome. The politics are hostage to powerful post truth narrative being blared by an energized opposition that is attracting large crowds to its rallies. The country’s largest province – Punjab – is mired in a deep constitutional crisis with no early end in sight. And pressures to take painful decisions are mounting, while the political leadership is facing strong headwinds against administering painful decisions to the populace.

In the midst of this whirlwind it is a good idea for those in power to avoid making irresponsible announcements that serve no discernible purpose. For example, on a day when State Bank Governor Reza Baqir was in Washington DC and preparing for his meeting with the IMF alongside Finance Minister Miftah Ismael, the Defence Minister Khwaja Asif took to the airwaves in Pakistan and announced that the Governor “will retire once his term ends.” Not only that, he went on to suggest that his government is likely to roll back the amendments to the State Bank Act that were passed in January.

Perhaps the minister did not fully understand the impact of his words or the importance of what he was saying. Governor Baqir is due to retire in the first week of May and the one question every foreign creditor of Pakistan asks is whether or not his term will be renewed, and if not, then who is likely to replace him.

The matter does not concern only foreign creditors. The financial markets at home are also watching carefully to see what the new government’s intentions are regarding the State Bank, its Governor as well as the amendments passed in January to strengthen its autonomy. It is therefore a bit baffling to wonder why the defense minister had to make such a categorical remark at a time like this. His government is in urgent talks with the IMF for resumption of the fund program, and Governor Baqir will be one of the signatories should it succeed in the short term. The exchange rate is coming under growing pressure once again, after a brief period of respite following the emergency interest rate hike of April 7 and foreign exchange reserves remain under immense pressure with the current account deficit for the month of March coming in at a billion dollars. It would be better to keep quiet about matters connected with the State Bank at a time like this, and only speak once a clear way forward has been found. Otherwise one is rocking the boat at a time when it is already in choppy waters.

For his part Imran Khan is doing everything to seed a false narrative in his followers about the state of the economy he left behind. In his Saturday press conference he claimed that the economy was in a healthy state when he left, citing export numbers, remittances and industrial growth. These are not the indicators to assess the health of the external sector. March data shows the current account deficit back above $1 billion, a near 180 percent increase from the same month last year, and well on its way to touch the $18 billion figure the PTI touted as the albatross around its neck when it came into power. The foreign exchange reserves had dropped to below 2 months of import cover and could reach crisis levels before the end of the fiscal year if the trend is not arrested quickly. Exports have indeed shown an uptick, rising by 27 percent in the nine months of the fiscal year, but the more worrying figure is the overall trade deficit that rose by 56 percent in the same period, nearly double the growth of exports.

Moreover the levels of external indebtedness today have reached historic highs. External debt servicing costs in FY20 crossed $14 billion, the highest they have ever been in absolute terms, and very high as a percentage of net current receipts (exports plus remittances). In FY21 they came down slightly to just above $13 billion. From here till end of next fiscal year, however, total external financing requirements are slated to touch $46 billion, up from a projected $35 billion as per the IMF staff report in February 2002. Granted the $46bn figure is for five quarters running from April 2022 till June 2023, the rise in the projected financing requirements is still very large and chances are by this summer the figure would have risen further still.

Pakistan is at a tipping point and cannot afford to be embroiled in a messy political battle of wills at this time. Given the pace at which the external sector is deteriorating, the country must get back onto an IMF program as soon as possible, and the new government has to swallow the bitter pill of slowing down the economy rapidly to control the bleeding. There is no other way at the moment unless an external power is willing to lend a helping hand with a funding line worth at least $5 billion (or thereabouts) to underwrite the country’s deficits for the next few months. This looks unlikely at the moment, especially while the fate of the IMF program is indeterminate.

Members of the ruling alliance should refrain from issuing categorical statements about critical economic policy decisions at such a delicate time. And the opposition should cease its campaign of deceiving the people about the reasons for its ouster, as well as the real health of the economy.


  1. “ Members of the ruling alliance should refrain from issuing categorical statements about critical economic policy decisions at such a delicate time.”
    Strange advice. On three occasions the IMF program has been suspended because the government committed what IMF wanted to hear and reneged as soon as money was disbursed. This has happened twice within 10 months. Better to tell IMF what it is absolutely unwilling to do (rather than committing and reneging repeatedly) and then commit to tougher reforms in some other area.

    That Pakistan will have to tighten its belt is a given. The question is – who should pay the price: the military, traders (as distinct from manufacturers) and real estate elites or the ordinary Pakistani?


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