Pakistan’s reliance on foreign loans and BOP crisis perpetuate financial instability

It is no longer news that Pakistan’s economy is grappling with severe financial instability, marked by many factors, including a looming debt crisis, high inflation, dwindling foreign exchange reserves, and structural economic challenges.

The country’s fragile economic condition has raised alarm among policymakers, international financial institutions, and investors, who worry about the South Asian nation’s capacity to navigate these economic headwinds.

One of the most pressing issues facing the country’s economy is its burgeoning external debts, which have already reached critical levels. 

According to reports, as of 2024, Pakistan’s public debt stands at approximately 89 percent of its Gross Domestic Product (GDP), while the country’s debt burden has been exacerbated by a reliance on short-term borrowing to meet immediate financing needs, pushing the nation closer to a debt trap.

However, the country’s finance minister, Muhammad Aurangzeb, has once again claimed that Pakistan “is heading in the right direction.” 

The finance minister also admitted the urgency of securing external financing for the approval of its $7 billion bailout package by the executive board of the International Monetary Fund (IMF), which in July this year reached staff-level agreement on economic policies with Pakistan for 37-month extended fund facility, said a hard hitting article in Pakistan’s leading English daily, the Dawn.  

According to an editorial published in the Dawn, Pakistan’s addiction to foreign loans to pay its bills has forced many to raise critical questions about its financial future and economic sustainability. 

For the last several years, the Pakistani authorities’ reliance on short-term loans and debt rollovers from friendly nations has become a recurring theme in the national economic narrative. 

The Dawn editorial said the success of a government in general and the finance minister, in particular, is judged based on their ability to deal with and borrow from multilateral and bilateral lenders. 

The Pakistani finance minister’s recorded address was broadcast amid further delays in the approval of the facility by the board, at least until the middle of this month (September, 2024), because of Pakistan’s failure to secure a timely rollover of $12 billion in loans from China, Saudi Arabia, and the United Arab Emirates (UAE), as well as arrange $2 billion in commercial loans to fill the financing hole for the present fiscal.

Finance minister Aurangzeb also spent a better part of his speech on ‘positive economic developments’ — like slowing inflation, closing current account gap, stable exchange rate, falling interest rates, improving reserves — achieved over the past six months, yielding real results in macroeconomic stability, rather than explaining the reasons behind the delays in confirmation of the debt rollovers by the friendly countries, according to the Dawn editorial. The South Asian nation’s economy has long been in the grips of financial instability, characterised by rising debt burden, stagnating growth, widening fiscal deficit, and recurring balance of payments crises, which force it to take recourse to heavy external borrowing to avert default on its foreign payments.

Moody’s Investors Services, in a report released last year (2023), stated that Pakistan was the most vulnerable to balance-of-payment (BOP) crises among the South Asian countries, with the lowest level of exports, at 10.5 percent of the country’s Gross Domestic Product (GDP).

The balance of payments, or BOP, is a statistical report that summarizes all economic transactions between a country and the rest of the world over a period of time.

According to a 2023 report by Delhi-based independent global think tank Observer Research Foundation (ORF), Pakistan has been facing a standstill due to a backlog of imports and reduced export volumes, which is gradually depleting its fragile foreign exchange reserves.

The think tank also said that economic progress has been hampered severely as the nation faces a worsening situation of the BOP, with deepening deficits in both the current and capital accounts. 

In terms of the capital account, the country is experiencing a sharp drop in foreign direct investment (FDI) inflows, largely due to its unstable and hostile business environment.

ORF said in its report that Pakistan’s investment environment has invariably been marked by high tariff rates, political unpredictability, terrorist concerns, strict tax and interest rate laws, and demanding security clearance requirements. 

These elements have discouraged foreign investment and made it difficult for international investors to fund domestic enterprises, it added.

Pakistan’s addiction to overseas loans to pay its bills has forced many to raise critical questions about its financial future and economic sustainability. 

The Pakistani authorities’ reliance on short-term loans and debt rollovers from friendly countries has become a recurring theme in the national economic narrative for the last several years. 

Even the success of a government in general and finance minister in particular is judged on the basis of their ability to deal with and borrow from multilateral and bilateral lenders, according to the Dawn editorial.

Reuters reported last week, citing the chief of the State Bank of Pakistan, that Pakistan is aiming to raise up to $4 billion from Middle Eastern commercial banks by the next fiscal year to plug its external financing gap.

In a wide-ranging interview with Reuters, the Pakistani central bank’s Governor Jameel Ahmad said the country was also in the “advanced stages” of securing $2 billion in additional external financing required for the IMF to approve a $7 billion bailout programme.

However, it is well known that the debt rollovers and the IMF bailout provide temporary relief but do not repair the underlying structural faults in a country’s struggling economy. 

The fragility of the present economic stability illustrates this quite clearly. The macro numbers have improved, but according to the Dawn editorial, at a massive cost to people and growth. 

Even the bilateral debt rollovers and IMF bailout will not enable Pakistan to push for growth beyond 3-3.5 percent, or the country might again be led into another balance of payments crisis.

The Dawn editorial opined that the only way forward towards long-term economic stability, growth, and debt-free prosperity lies in broadening the tax revenue base, increasing and diversifying exports, and attracting sustainable foreign direct investment. 

No shortcuts will work this time around, it added.

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