For Pakistan’s economy, 2023 is filled with hopes and fears. The brightest hope is this: the country will get $1.9 billion from the International Monetary Fund (IMF), which will open the doors for multi-billion-dollar funds from Saudi Arabia, China and maybe the UAE.

If that happens, forex reserves will increase, allowing the State Bank of Pakistan (SBP) to ease forex controls imposed on banks. That, in return, will help businesses open and retire import letters of credit as per routine.

That will also mean there will be no “going rates” for forex transactions in the interbank market. Banks will restart selling dollars at the demand and supply-driven rates.

It is also hoped that this, supplemented by an effective crackdown on massive dollar smuggling to Afghanistan, will enable normal working in the open market. People will be able to buy dollars as much as they want from the open market at a rate slightly higher than in the interbank market.

But these are just hopes.

The main challenge will be how best to coordinate to achieve key common objectives like ensuring economic growth and exchange rate and price stability

Fears for 2023 are many. Will the IMF money plus forex funding from friendly countries be enough to meet our external sector financing gaps when import restrictions are eased? If not, will the country revert to import restrictions once again? Or if not, how fast the buildup in forex reserves will melt down? Will Pakistan have to negotiate another, larger IMF loan to avoid defaults?

Only time will tell what happens. But the challenge for the government is how best to rationalise imports. Pakistan’s energy and food import bills are too bulky. The government cannot directly cut the food imports bill, but it can contain energy imports. But that must be done in a manner that the export sector is not hurt too badly and consumers already facing electricity and gas shortages get at least enough supplies to live and work normally.

The year 2023 is the year of general elections in Pakistan and a year of global economic slowdown amidst widespread food and energy shortages. So, it will be very challenging for the government to improve external sector inflows amidst growing political uncertainty at home and risks of unpredictable shocks in food and non-food commodity markets abroad.

Besides, the role of the US in Pakistan’s renewed “war against terrorism”, the level of cooperation between Islamabad and Washington will also be crucial in determining the economic fallouts of this war.

Pakistan’s post-flood economy is too weak. The state cannot afford to spend too much on a new “war against terrorism”. Fiscal indicators are alarming. The government’s net income is so low now that it suffices only two key heads of the national budget: defence and debt servicing. So, where on earth will money come from to finance the federal government’s expenses and annual development plans? And how will the government provide even “smart, targeted” subsidies to tens of millions of financially poor and vulnerable citizens?

During the past five fiscal years, Pakistan’s fiscal deficit has ranged between 6.6-8.9 per cent of GDP, which is the main source of our economic woes. A fiscal deficit beyond 5pc of GDP is simply not manageable. A larger deficit needs larger internal and external borrowings, and both lead to further accumulation of internal and external debt. That, in turn, leads to a greater and greater allocation of resources on debt servicing every year, leaving little for development after meeting expenses on the defence and day-to-day running of the government.

On the monetary side, one can rightly hope that the central bank will continue to increase interest rates, at least during the first half of 2023, to ease inflation towards the new, elevated range of 18-20pc. But the underlying assumption of the monetary tightening is that since it keeps the growth of money supply and credit under check, it effectively curbs aggregate demand and controls inflation.

Keeping overall money supply growth just through interest rate hiking is not possible in an economy like Pakistan, where the size of the parallel economy is equal to one-third or more of the actual economy — and where documenting the incomes of the rich and the powerful is next to impossible. (You must have read dozens of news stories about how these rich and powerful people misuse the National Identity Cards of poor street hawkers to whiten black money worth billions of rupees through fake bank accounts opened in their names. Unscrupulous bankers connive).

For both fiscal and monetary authorities, the main challenge in 2023 will be how best to coordinate to achieve key common objectives like ensuring economic growth, exchange rate and price stability, and financial system stability. If that requires rewriting some laws, let’s rewrite those laws.

Published in Dawn, The Business and Finance Weekly, January 2nd, 2023