Measured by the level of external trade, foreign investment and international financial linkages, Pakistan’s import-oriented economy with a growing appetite for debts is not as globalised as many other emerging markets. Yet, barring some very brief spells, the fragile economy suffers from continuing external pressures.

And going by the observations of policymakers it seems that the country faces much bigger external risks than its peers from prevailing and evolving adverse global trends.

The current escalation of global geopolitical tensions and domestic political conditions may aggravate the macroeconomic indicators, says the ministry of finance (MOF).

The Ukraine crisis in particular is the most important external sector risk, said MOF’s Economic advisor group wing (EAGW) monthly report on economic trends on March 28. Likewise, the report adds, that political conditions at home are building domestic risks.

Policy advisory loans by international creditors are pushing Pakistan further into the debt burden, which the government could avoid by relying on its own researchers

But EAGW cannot ignore the fact that it is policymakers who cannot build a sound domestic political economy while providing space for undesirable foreign influences.

Analyst Sirajuddin Aziz says no economy can be stable without political stability. Politics, economics and social well-being are deeply intertwined. These three factors must operate in tandem for any nation to achieve progress.

In case of external risks, what the (EAGW) report also forgets is that one of the major sources of financial instability is the surge in foreign debts with repayments of principal loans and debt servicing made exorbitantly expensive by the free fall of the rupee against the dollar.

The Korangi Association of Trade and Industry (KATI) has expressed its deep concern over the all-time high value of the dollar against the rupee and the hike in price of imported industrial raw materials. KATI president says this would lead to an increase in prices of locally produced goods that would push the inflation rate upwards and trigger unemployment.

The unprecedented foreign borrowings, improved export earnings and increased inflow of overseas workers’ remittances did not stop the free fall of the rupee or shore up the declining foreign exchange reserves.

According to the Pakistan Institute of Development Economics (PIDE), the PTI government has obtained over $53 billion in gross foreign loans since it assumed power and around three-quarters of these were either policy loans or short-term commercial debts.

And this trend is being strengthened over time. Around 89 per cent of the new gross foreign loans during eight months of the current fiscal year are reported to have been acquired for bridging the budget deficit and building declining foreign exchange reserves.

Owing to a higher ratio of short-term loans, the average maturity of external debt has deteriorated to six years from eight years by the end of June 2021.

The opposition within the government against excessive borrowings from international creditors and the effectiveness of their debt-driven reforms continues to surface from time to time in public debate while the PTI government is unable to honour all its agreements with the International Monetary Fund (IMF).

During the initial stage of negotiations for the $6bn loan facility, the then finance minister and finance secretary were replaced and then State Bank governor was asked to resign before completing his 3-year term.

Now the opposition is coming from the technocracy. Former IMF official Dr Nadeem Ul Haque, currently PIDE vice-chancellor of the government-owned PIDE says the policy advisory loans by international creditors are pushing Pakistan deeper into the debt trap, which the government could avoid by relying on its own researchers.

The donors are dumping their research in Pakistan with money on the table that Pakistan has to return, PIDE chief argues and adds ‘without having any check or care of the output.’

Earlier, Chairman of the Federal Board of Revenue (FBR) Muhammad Ashfaq said the FBR was better off without the $400 million World Bank loan meant for increasing revenue.

But a recent report of the Asian Development (ADB) presents a different view on Pakistan’s ability to face eternal risks to the domestic economy. Its narrative is as follows: a non-diversified financial sector represents a risk because of the inability to deal with financial shocks and periods of uncertainty. Its capacity also fails to support the development of long-term finance and risk capital solutions.

Banks in Pakistan offer short-term maturity loans and offer very limited long-term financing for infrastructure projects.

Pakistan’s financial sector is a predominantly bank-based system with banks accounting for almost 75.5pc of the country’s total financial assets whereas national savings instruments account for 12.7pc and the insurance sector 5.5pc.

The country’s under-developed capital markets have been ineffective in the mobilisation of savings, resulting in a wide savings-investment gap. In December 2021, about 255,000 individuals had invested in stock investment accounts. The role of capital markets has regressed with the number of companies in the Pakistan Stock Exchange dropping from 747 in 2001 to 533 by December 2021, says the ADB report.

It would be pertinent to point out that the financial sector and capital market prospered and were much more diversified on the back of the rapid industrialisation of the 1960s. The number of listed companies continued to grow faster than ever before or after. But things changed when industries were hit by a sudden rise in foreign debt servicing costs as a result of the sharp devaluation of the early 1970s and the de-industrialisation that followed since then.

Development financial institutions as such the National Development Corporation and Investment Corporation of Pakistan were closed down and the Industrial Development Bank turned dysfunctional.

The financial system needs rapid expansion of commodity-producing sectors to diversify its base. Looking at the performance of the faltering international financial system and global market fragmentation, independent analysts disagree with the findings of the ADB report. Mr Aziz says the economies of most countries are pledged or mortgaged to economically powerful nations coupled with the multi-lateral financial institutions under their influence.

Though international cooperation is inescapable, one may point out, it has to be based on sovereign equality to help trading and investment partners share equitably the fruits of economic progress. For that to happen Pakistan has to take a path of economic self-reliance.

Pakistan has been living with political and economic instability for decades struggling without success to take the sustainable path to the country’s progress and the people’s prosperity.

The country has however moved away from long spells of extra-constitutional rule to quasi-democracy. And the current situation is providing an impetus to participatory democracy.

Published in Dawn, The Business and Finance Weekly, April 4th, 2022