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The country’s biggest economic issue today (in immediate terms) is its falling foreign exchange reserves. Nothing else. It must shore up in the next few months to not see a situation like Sri Lanka in Pakistan. There are two ways to gauge the reserves health – one is to see the import cover – that is to measure how much more the country can sustain without defaults. The other is Net International Reserves (NIR) – it gets the pulse on the quality of reserves and its usability. IMF and other lenders look at these two measures very closely.

In terms of import cover, today the country is barely covering 7-8 weeks of imports on SBP reserves. The situation was similar in Jun 18 when the country was covering 8-9 weeks of imports, and in June 2013, when the import cover was 7-8 weeks. 2008 was no different. Thus, none of the successive four governments have not inherited a balance of payment crisis kind of situation.

One can argue on the reasons behind the crisis – like in PPP term (FY09-13) oil prices averaged at $92/barrel while in the PMLN term oil prices averaged at $68/barrel. Thus, the PMLN was lucky and the country wasted earned reserves by not increasing interest rates and keeping currency artificially overvalued.

In PTI term, there was an unprecedented crisis – Covid – which proved to a blessing in the start and after that commodity super cycle reversed it. The bad policy was expansionary budget of FY22 – which was against the will of the IMF. Then the commodity super cycle worsened due to Ukraine war.

The current account started slipping. However, the policy response was quick – in terms of currency adjustment and interest rates hike. The good thing is that the current account is coming in control – this is in sharp contrast to when PMLN left in 2018 – as policies reversal was done by PTI – with some delay- and the current account deficit took time to be tamed.

All these are reflected in NIR numbers. The NIR was minus $7.0 billion in June 13 and improved to plus $7.9 billion in Jun16. Those three years were better. The stability was there. The stock market rocketed. And CPEC was initiated. Then the political instability in 2017 and government’s adamancy on not correcting the over-valued PKR and keeping interest rates low despite increasing current account deficit was a recipe of disaster. One may argue that had the instability not the case in 2017, the situation could have been different.

Then the PTI government assumed the NIR of minus $8.3 billion in Sep 18. It was a time when corrective measures were required and IMF programme was badly needed. The government took almost nine months before concluding with the IMF in May19. The NIR was at its lowest ebb in June 19 at minus $15.5 billion with 5-6 weeks of import cover. That was the worst time. The PTI economic team was changed.

Then the recovery started. And the NIR was almost in balance in Sep 21. The import cover was of almost 4 months in Jun-21. That was the time when the populous budget was presented by the new FM – and the precious reserves started falling. Then the realization synced in, and the IMF got the country back into the track.

However, the political instability started with the talks of vote of no confidence in the start of 2022. The PTI government went into populous mode. The electricity and petroleum prices were reduced and frozen in Feb-22. IMF took notice of this and the 7th review under the current programme got in limbo. The only difference was that SBP was doing its job of currency adjustment and market interest rates were going on.

Seeing the worsening macro indicators, absence of IMF’s nod and political instability, the other lenders started turning back as well. The reserves kept on falling without rollover of the existing loans from friendly countries. Credit default swap (CDS) of Pakistan international bonds skyrocketing and the global capital market became too expensive. So is the case of other commercial loans. The NIR was minus $1 billion in Dec-21 and is estimated at minus $8.1 billion in Mar-22 – biggest fall in a single quarter.

That is the stock of the situation and a brief narration of economic vulnerabilities due to global price shocks, internal political issues, and policy choices by respective governments. Having said that, the situation today is not as bad as it was during Jun-18 to Jun-19. The situation in Jun-13 was even better. Although the NIR and import cover in June-13, June-18 and Mar-22 are similar, the key difference is that current account deficit was in control in 2013 and the signs are of it taming down in the 2HFY22.

Thus, political stability and getting the IMF’s nod along with roll-over and support from friendly countries could take the economy out of the woods quickly. The lesson to learn from Powers-that be is that experiments and political muddling have dire economic consequences.


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