The International Monetary Fund’s (IMF’s) board has disbursed around $700 million as second tranche under a $3 billion Stand-By Arrangement (SBA). The IMF’s completion of its first review of the programme and the board’s decision bring the total disbursements under the Stand-By Arrangement (SBA) to about $1.9 billion.

There are now tentative signs of economic activity picking up and external pressures easing. However, much should come from private sources. The value of IMF funds is to provide a stop gap, rebuilding of confidence in a way that encourages private flows to resume. But what did the IMF demand? Cut spending! including revising its budget, a hike in its benchmark interest rate, and increases in electricity and natural gas prices, especially at a time when Pakistan’s spending on critical ingredients of human and economic development was already too low.

In answer to Pakistan’s protests, the IMF command was: Be quiet! Don’t create a crisis! Austerity is needed, but it is not a solution. Then what is to be done? A national investment plan is needed.

First and foremost, IMF funds will also help Pakistan avoid defaulting on its international obligations, which could have seismic consequences for its economy and its people.

Replenishing foreign reserves is crucial in this regard. Aid programmes will also help address the flood recovery, but this will be much more manageable if Pakistan’s reserves rise to levels that instill confidence in its ability to pay its debts.

If we can look at our primary economic indicators, inflation in our country was at a 48-year high in January as thousands of containers of food items, raw materials, and equipment were stuck in ports after the cash-strapped government curtailed imports.

It worsened to 27.55 percent recently. Pakistan was not the only country feeling the pain of rising inflation and an economic slowdown; the question was how other countries were handling their economic crises. Dubai, one of the emirates of the United Arab Emirates (UAE), and Qatar had international financial centers where local laws were not implemented; rather, they had separate sets of laws.

Countries create corporate spaces with no government involvement, which gives confidence to the private sector. We need to reduce the size of government, for which immediate action is required to streamline government operations. To do this, firstly, ministries should be transferred to the provinces as mandated by the 18th Amendment to the Constitution.

Secondly, redundant government agencies must be shut down, and those performing overlapping tasks should be merged to eliminate inefficiencies. The government’s footprint in the economy exceeds 60% of the GDP, while the cost of regulations for just 24 different activities consumes a staggering 45% of the GDP. Moreover, building trust with businesses will signal that we are serious about economic revival and moving on a path of progressive growth.

Similarly, a debt management strategy was essential in order to attract public and private international lenders. The total public debt-to-GDP ratio has consistently exceeded 70% in recent years, raising concerns about fiscal sustainability.

High debt servicing costs limit the resources available for development initiatives and public services. The composition of public debt has also shifted significantly, with greater reliance on domestic debt since FY 2010 due to limited external funding sources.

However, this shift has brought its own challenges, notably the high cost of servicing domestic debt, which has increased due to frequent policy rate revisions. Moreover, the Pakistani government often fails to adhere to established fiscal regulations, such as the Fiscal Responsibility and Debt Limitation Act (2005), which mandates maintaining the total public debt to GDP ratio within 60%. In view of such a situation, “a significant lifestyle change in Pakistan was required.”

As a short-term solution, a comprehensive framework for managing public debt and evaluating the necessity of specific loans based on their return on investment is essential. Establishing a centralized debt office with oversight over domestic and foreign debt would enhance decision-making capabilities and risk identification.

In addition, economic growth is a fundamental solution to the debt problem. Policies should focus on enhancing productivity, innovation, and access to international markets, as these factors contribute to increased government revenue and reduce the relative size of the debt as a percentage of GDP.

Conclusively, we should steer Pakistan towards a future characterized by fiscal prudence, economic vibrancy, and sustainable growth. It is an opportunity to shape policies that will not only address current issues but also lay a robust foundation for the nation’s enduring prosperity. In the face of fiscal challenges, Pakistan has the potential to enact meaningful reforms and achieve economic stability.

These above recommendations, covering the role of government, managing inflation, and debt management, provide a roadmap for policymakers to navigate towards a fiscally responsible and prosperous future for the nation.

Copyright Business Recorder, 2024

Muhammad Sheroz Khan Lodhi

The writer is an economic analyst.

Email: [email protected]


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