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Amid commencement of talks between Pakistan and the International Monetary Fund (IMF), there have been high hopes that the stalled $6-billion Extended Fund Facility (EFF) will be revived in the coming days.

The IMF mission is expected to visit Pakistan, and Islamabad has also sought an extension of the programme by one year and an increase in the loan amount by $2 billion, bringing total EFF funding to $8 billion.

The anticipated resumption expectedly shifted the mood of otherwise somber markets, but not for long.

It raised the all-important question of whether the revival will end Pakistan’s economic woes and whether it will be the last time Islamabad knocks on the IMF’s doors to meet its funding needs.

To bring some context to the issue, it’s important to know that Pakistan, since becoming a member of the IMF in the 1950s, has approached the international lender on 22 occasions, with the most recent being in 2019. No other atomic power has sought financial assistance on this many occasions from the US-based lender, indicating the unpredictability of the South Asian country’s economy.

In truth, the fundamental problem of Pakistan’s economy as a whole has been its inability to generate enough foreign exchange, which compels the country to approach creditors including the IMF to meet funding needs. In other words, it simply consumes more dollars than it earns.

Pakistan’s latest economic indicators do not paint a rosy picture either, as the current account deficit has surged to over $13 billion in the first nine months of the fiscal year, keeping foreign exchange reserves under pressure. Reserves held by the central bank have already depleted to $10.5 billion, not nearly enough to even cover the two-month import bill.

So what can be done to reverse this cycle?

A country generally has three sources to generate reserves — exports, remittances and FDI (Foreign Direct Investments).

Looking at current figures, Pakistan export numbers hit $29 billion in the fiscal year to date (FTYD), an improvement of 25% YoY. Despite showing significant improvement, it remains far below than the $62.1 billion import bill registered in the same period.

On the other hand, Pakistan has failed to attract FDI, as it only managed to grab $1.285 billion in the first nine months of this fiscal, reflecting a Year on Year decline of 2%.

However, remittances have remained the only ray of hope for Pakistan's economy on the external front, with $23 billion accumulated in 9MFY22, up by 7% YoY. Contribution from the overseas Pakistani community is becoming increasingly crucial for the country with each passing season. However, this too appears to be showing signs of plateauing, amid resumption of international travel.

Thus, the need of the hour for economic managers is to introduce critical reforms aimed at supporting private sector investment, raising export competitiveness, restricting unnecessary imports and improving the financial viability of different sectors of the economy to attract foreign investors.

If these measures are not taken on an urgent basis, the country will remain entwined in the borrowing cycle, which will only worsen with increased external debt.

On the other hand, there is an increasing risk of a further spike in inflation as the country gets onboard with the IMF, as economic experts have already warned that it could rise up to 15%.

Therefore, economic think tanks should devise a strategy to protect the most vulnerable sections of the society from an impending inflation spike.

This could be achieved through the utilisation of already available data that the government has gathered through the Benazir Income Support Program (BISP), which can be used for granting targeted subsidies to low-income communities.

Furthermore, all-out efforts should be made by the government machinery in increasing the tax base. This could also be achieved through using databases, either from NADRA or from the banking sector, to identify potential taxpayers that can be brought into the net.

Only through these means and measures can Pakistan actually get rid of its dependence on international creditors and achieve economic independence.

However, in order to achieve this, it is imperative that aggressive measures are taken by the new government, which can be attained only through prudent policy-making.

The article does not necessarily reflect the opinion of Business Recorder or its owners

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Ali Ahmed

An avid wrestling fan, just likes to have fun with numbers and stats.

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